New York State Releases SALT Workaround Guidance

We previously wrote about new changes to the New York State tax law that created a workaround to the $10,000 Federal limitation on state and local tax (SALT) itemized deductions for owners of pass-through entities (including LLPs, LLCs and S Corporations).

New York State has now released specific instructions and further guidance on this SALT workaround, which they are calling the pass-through entity tax (PTET).

The detailed guidance can be found here.

Background

Under the Tax Cuts and Jobs Act of 2017 (TCJA), the Federal tax reform passed under the Trump administration, the combined itemized deduction for State and Local Taxes (SALT) was limited to $10,000. SALT includes personal income taxes such as New York State personal income tax and real estate taxes.

New York State’s April 2021 budget, now law, created a workaround to the SALT limitation in the form of a pass-through entity tax (PTET) which is an optional tax that partnerships or New York S Corporations may annually elect to pay on certain New York source income. This tax is a state level tax assessed and paid at the entity level, with a credit flowing through to the individual owner(s) and partner(s) to offset New York State tax at the individual level.

The 2021 tax will be due by March 15, 2022 (although you may wish to pay the tax by December 31, 2021 if you want to deduct the payment in 2021) and starting in 2022 the entity will be required to make quarterly estimated PTET payments

Making the Election

The deadline to make the election for 2021 is October 15, 2021. Going forward the deadline for each year is the entity tax filing deadline of March 15.

Important Note for Sole Proprietors and Single-Member LLCs

The pass-through entity tax is only available to pass-through entities that file a partnership or S Corporation tax return in New York State. If you are a sole proprietor or operate through your 100% owned LLC, then the income from your activity is reported directly on your personal income tax return and not on a separately filed partnership tax return and accordingly, you are not eligible for this pass-through entity tax.

However, there are strategies that exist that will enable you to be treated as a pass-through entity that does file a separate tax return.