New York Enhances SALT Cap PTET Workaround for
Pass-Throughs; Will Include PTET for NY City
New York State is expanding a tax break that allows smaller companies to circumvent the $10,000 limit on state and local tax deductions from the 2017 Tax Cuts and Jobs Act, similar to a workaround also being permitted in some other high-tax states.
The legislation enables resident S corporations and partnerships to get larger tax benefits under the state’s pass-through entity tax regime. Under the new rules, starting with tax year 2022, S corps in which all shareholders are New York State residents can now remit the pass-through entity tax on all income allocated to the resident shareholders, instead of limiting the PTET to only New York-sourced income. The legislation can also help S corporations in which the owners live in New York, but have significant projects going on in other states.
The legislature passed the bill about a month after the original date of March 15 for tax year 2022, so at first it seemed that only those businesses that had previously opted into the PTET were eligible to take advantage of the rule change because the budget bill didn’t modify the PTET election due date. That would have affected many resident S corps with low New York income allocations that hadn’t made the election by the deadline. However, New York then amended its PTET provisions to extend the election due date to Sept. 15, 2022, so S corps, partnerships and LLCs would have until mid-September to make the election.
The bill also includes a new, optional New York City Pass-Through Entity Tax for partnerships with at least one New York City resident partner, as well as city resident S corporations. It has been passed by both houses of the legislature and is expected to be enacted into law. The tax will be imposed at the city’s highest personal income tax rate of 3.876% and will contain an offsetting individual tax credit. For those businesses that opt in, an initial annual irrevocable election by March 15, 2023 will be required. The new tax will be offered starting in 2023.
The original PTET regime was effective starting in 2021, and the latest changes took effect in 2022.
In addition to New York, 13 other states had pass-through entity taxes prior to 2022 including Alabama, California, Connecticut, Idaho, Illinois, Louisiana, Massachusetts, Maryland, Minnesota, New Jersey, Rhode Island, South Carolina and Wisconsin. The pass-through entity tax went into effect in 2022 in Arkansas, Arizona, Georgia, North Carolina, Oklahoma and Oregon. States with pending legislation to enact a pass-through entity tax include Iowa, Mississippi, Ohio, New Mexico, Pennsylvania, Utah and Virginia.
Those benefits could be important for taxpayers in these states as the Inflation Reduction Act that President Biden signed into law this week didn’t include a rollback of the limitation of $10,000 on the SALT deduction for state and local income and sales taxes, especially in high-tax states like New York and New Jersey.
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