New York’s PTET Benefits Partnerships and S Corporations
Business owners in New York may opt in to take advantage of tax benefits provided through the Pass-Through Entity Tax (PTET). Enacted in 2021, the PTET creates a workaround to the federal limitations created by the “SALT Cap” IRS changes made after the 2017 Tax Cuts and Jobs Act.
Many states (including Connecticut and New Jersey) created PTETs in response to the state and local tax deduction limitation for federal income taxes, which was enacted as part of the 2017 Act. As part of that act, the federal Internal Revenue Code was changed for tax years beginning in 2018 in a way that limited an individual’s itemized deduction for state and local income and property taxes to $10,000 ($5,000 if filing separately). For individual taxpayers in higher-tax states like New York, Connecticut and New Jersey, this “SALT Cap” acted as a de facto federal tax increase. These taxpayers could no longer claim itemized deductions for the state and local income and property taxes in excess of the $10,000 limit, whereas before 2018 there was no limitation under the regular tax system (although they were not deductible under the Alternative Minimum Tax).
The PTET is an optional tax that partnerships and New York S corporations may annually elect to pay on certain income. Eligible entities may opt in on or after January 1 through March 15. The election to opt in to the PTET must be made online on an annual basis and is irrevocable during that year. Only authorized persons from a business entity may make the election.
Under PTET, business earnings are taxed on the electing entity’s state tax return and the partners/disregarded entities/shareholders receive credits on their individual state returns. By opting in, the business entity will voluntarily elect to pay an entity-level income tax on at least a portion of its income allocated to only individual partners and shareholders at graduated rates. The calculation of PTET taxable income differs between electing New York S corporations and partnerships, and the State provides different worksheets to aid in determining the figure. The amount of PTET due is graduated, starting at 6.85% on taxable income of $1 or more and increasing to up to 10.9% on taxable income in excess of $25 million. PTET payments are made as quarterly estimated PTET payments on March 15, June 15, September 15 and December 15 of the election year.
The tax paid is deductible on the eligible pass-through entity’s federal tax return and reflected as a reduction of the individual partners’ or shareholders’ income or loss reported on a Schedule K-1. The state provides partners and shareholders of eligible electing pass-through entities a tax credit against state personal income tax for their share of the PTET, thereby circumventing the federal, state and local tax cap. For New York residents, it is a dollar-for-dollar tax credit, in that each eligible credit claimant’s PTET credit is equal to his/her direct share of PTET that was reported by the pass-through entity on its return. This varies by state, particularly in Connecticut, where only 87.5% is applied as a credit, which was unaffected by the State’s 2023 passage of HB 6941 which did make other changes.
With the passage of the 2025 One Big Beautiful Bill Act, the SALT Cap has been increased to $40,400 for the 2025 tax year with 1% increases through 2029 before reverting back to $10,000 for 2030 and beyond. The temporary increase does include a phase-out for higher-income taxpayers through 2029. For 2025, the deduction begins to phase out for those with modified adjusted gross income (MAGI) exceeding $500,000. This threshold will also increase annually, reaching $505,000 in 2026 and rising by an additional 1% thereafter. For taxpayers whose MAGI exceeds these thresholds, the cap is reduced by 30% of the excess income.
It is yet to be determined if individual states will modify their PTETs due to this change. In New York some 2025 modifications are being discussed, such as extending the PTET election date and bringing the credit more in-line with Connecticut’s and changing the election deadline.
If you would like to discuss how the PTET can affect your returns, or if there are any changes to the benefits made for this year, please reach out to us. You may contact Maria Mosa, at mmosa@hvandpartners.com or 914-617-7620 ext. 118, and she will put you in touch with a partner to assist you.
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