New York Enacts a Pass-Through Entity Tax: How the SALT-Cap Workaround Works, and What Still Awaits Guidance

Key takeaways

• New York enacted an elective pass-through entity tax (PTET) as part of the FY 2021–2022 budget (S.2509-C / A.3009-C, Part C), signed April 19, 2021, creating Tax Law Article 24-A. It is effective for tax years beginning on or after January 1, 2021.
• The structure works because the entity pays and deducts the tax at the business level — outside the $10,000 SALT cap — and owners take a refundable New York credit for their share. IRS Notice 2020-75 confirmed this treatment is respected federally.
• The PTET is elective, made annually at the entity level by an authorized person, and available to partnerships (including LLCs taxed as partnerships) and New York S corporations. Single-member LLCs and sole proprietors cannot elect.
• The enacted statute does not supply a workable 2021 election deadline or estimated-payment schedule — those mechanics await Department of Taxation and Finance guidance, which entities should wait for before finalizing the first-year election.

The problem the PTET solves

Since 2018, individuals have been limited to deducting $10,000 of state and local taxes on their federal returns. For a New York pass-through owner — a partner or S corporation shareholder paying New York's high marginal income tax rates on business income — that cap erased most of the federal benefit of those state taxes. The income flows through to the individual, the state tax is paid at the individual level, and the deduction for it is capped.

The workaround moves the state tax off the individual's return and onto the entity's. An entity-level income tax is an ordinary business expense that reduces the income flowing through to owners — and a business deduction is not subject to the $10,000 individual cap. The owner then receives a credit against New York personal income tax for the entity-level tax paid on their behalf. Done correctly, the owner ends up roughly where they would have been on the state side, but with the federal deduction restored.

This is not an aggressive gambit. In November 2020, the IRS issued Notice 2020-75 confirming that a "specified income tax payment" — an income tax imposed on and paid by a partnership or S corporation — is deductible by the entity in computing its non-separately-stated income and is not subject to the SALT cap at the owner level. New York's PTET is built squarely on that blessing.

How New York's PTET is structured

The budget legislation signed April 19 created Tax Law Article 24-A. The essential features:

• Elective and entity-level. The PTET is optional and is elected annually by the entity through an authorized person — a member, partner, or officer with authority to bind it. The election is irrevocable once the due date passes.
• Effective for 2021. It applies to tax years beginning on or after January 1, 2021, so the first year available is the current one.
• Eligible entities. Partnerships, including LLCs treated as partnerships, and New York S corporations may elect. Single-member LLCs, sole proprietorships, and ordinary C corporations cannot.
• The tax. The PTET is imposed on the entity's pass-through entity taxable income at graduated rates — 6.85% on income up to $2 million, rising through 9.65%, 10.30%, and 10.90% in higher brackets.
• The owner's credit. Each partner or shareholder subject to New York's personal income tax receives a credit equal to their direct share of the PTET the entity paid. The credit is refundable: if it exceeds the owner's New York tax, the excess is treated as an overpayment to be refunded.

The combined effect is that the entity captures the federal deduction and the owner is made roughly whole on the New York side through a refundable credit. For a profitable New York pass-through with owners in the top brackets, the federal saving can be substantial.

What the statute leaves open — and why that matters now

Here is where discipline is required, because the enacted statute and the practical mechanics are not yet fully aligned.

The statute ties the annual election to the due date of the first estimated payment, and ties the estimated-payment schedule to a calendar that, for the 2021 tax year, runs from the prior year. For a tax enacted in April 2021, that creates a first-year gap: the statutory machinery points to dates that, for 2021, had already passed or do not cleanly apply. New York will need to supply workable first-year mechanics — the actual deadline to make the 2021 election, and whether and when 2021 estimated PTET payments are required — through Department of Taxation and Finance guidance.

Until that guidance issues, two things should temper any rush to act:

First, do not treat a specific 2021 election deadline as settled. The annual election in the ordinary course is geared to early in the tax year, but the first-year deadline for 2021 is a matter the Department must clarify, and it is not safe to assume a date the statute does not clearly provide.

Second, do not assume the 2021 estimated-payment rules. The timing of when the entity pays the 2021 PTET affects when the federal deduction is available — generally, a cash-method consideration of paying the tax in the year you want the deduction. The first-year payment schedule is exactly the kind of detail the Department will address, and entities should confirm it before building a payment plan around assumptions.

The right posture is to model the benefit now — identify which entities and owners gain, and by how much — and to be ready to elect promptly once New York publishes the first-year deadline and payment mechanics, rather than electing or paying on assumptions that guidance may contradict.

How New York compares to the early adopters

New York is not breaking new ground in concept; it is joining a movement that began before the IRS even blessed it. Connecticut enacted the first state pass-through entity tax in 2018 — and made it mandatory rather than elective, the principal structural difference from New York's opt-in design. A wave of elective regimes followed: Wisconsin (2018), Oklahoma, Louisiana, and Rhode Island (2019), and New Jersey's Business Alternative Income Tax and Maryland's election (both effective for 2020), among others.

The comparison that matters for a New York owner is less about rates than about mechanics: whether the regime is elective or mandatory, when the election and payments are due, and how cleanly the owner's resident credit offsets the entity-level tax. New York's design is elective and credit-based, closest in spirit to New Jersey's BAIT; the cleanest contrast on the elective-versus-mandatory axis is Connecticut. Multistate owners who already operate in those states should not assume New York's clock or credit mechanics match what they know elsewhere — each state's regime runs on its own rules.

What to do now

For owners of profitable New York partnerships and S corporations, the work this spring is analytical and preparatory. Model whether the PTET produces a net federal benefit for the entity and its owners, accounting for the owners' residency and other-state credits. Confirm the entity is an eligible electing entity — single-member LLCs and sole proprietors are out. And calendar a check for the Department's first-year guidance, so the 2021 election and any required payments can be made on the published rules rather than on the statute's incomplete first-year machinery. The opportunity is real and worth capturing; capturing it correctly means electing on facts, not on assumptions.

FAQ

Who can elect New York's PTET? Partnerships, including LLCs taxed as partnerships, and New York S corporations. Single-member LLCs, sole proprietorships, and C corporations cannot elect.

Does this actually beat the $10,000 SALT cap? Yes, for the right entity. The tax is paid and deducted at the entity level — outside the individual SALT cap — and owners take a refundable New York credit for their share. IRS Notice 2020-75 confirmed the federal deduction is respected.

When is the 2021 election due? The enacted statute does not supply a clean first-year deadline; New York must clarify it through Department guidance. Do not rely on an assumed date — wait for the Department's first-year rules before electing for 2021.

Will I owe 2021 estimated PTET payments? The first-year estimated-payment schedule is among the mechanics the Department must address. Because payment timing affects the federal deduction, confirm the published 2021 rules before making payments.