Is New York’s Pass-Through Entity Tax a SALT cap workaround?

On Behalf of | Sep 22, 2021 | Business Tax, Tax Collection

New York’s Pass-Through Entity Tax (PTET) is an optional tax available for partnerships and S corporations. When used wisely, election of the PTET may help to bypass the Tax Cuts and Jobs Act’s (TCJA) $10,000 state and local tax (SALT) limitation.

How does this work?

Basically, the Internal Revenue Service (IRS) has stated that businesses, like a partnership, who use a pass-through tax entity structure are allowed to deduct the businesses’ SALT expenses without an add-back on the business owner’s personal taxes. This means the business will pay the tax, since it is not subject to the SALT limitation, and get a deduction. Then, the individual will get a credit on their own state income taxes.

How do we elect the PTET?

Only an authorized person can make the election. This can include a member, partner or owner of a partnership or an officer, manager, or shareholder of an S corporation. It is also important to note that the deadline is quickly approaching. The election is available from January 1, 2021 through October 15, 2021. That means businesses only have a couple more weeks to decide whether or not to make the election.

There are additional requirements. For example, publicly traded partnerships are not eligible. Due to the complexity of this law, it is wise to seek legal counsel to help determine if election of the PTET is in your business’ interests. It is also important to note that these laws vary by state, so it is wise to find someone with knowledge of applicable state and federal law. The attorneys at Goldburd McCone are familiar with these types of questions and can help review how election would impact your tax obligations.