New York State Price range Settlement Contains A Cross-By Entity Tax As A SALT Workaround – Tax

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New York State Budget Agreement Includes A Pass-Through Entity Tax As A SALT Workaround

12 April 2021

Kramer Levin Naftalis & Frankel LLP

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On Wednesday, April 7, 2021, the New York Legislature reached an
agreement with Governor Andrew Cuomo for the fiscal year 2021-2022
state budget. Both the Assembly and Senate have passed the budget
legislation, which now awaits the Governor’s
signature. The agreed-upon budget package includes a number of
revenue raisers, such as higher personal income tax rates for
individuals earning over $1 million annually and an increase in the
corporate franchise tax rate. The budget legislation also includes
a “Pass-Through Entity Tax,” designed as a workaround for
the federal $10,000 limitation on the deductibility of state and
local taxes (the SALT cap), which was enacted as part of the
federal 2017 legislation known as the Tax Cuts and Jobs Act (the

The Pass-Through Entity Tax is an entity-level tax that eligible
partnerships and New York S corporations can elect to pay on their
taxable income for taxable years of the partnership or S
corporation beginning after Dec. 31, 2020.1 Direct
partners and shareholders of electing businesses receive a credit
against their New York State personal income tax liability for
their share of the entity-level tax paid.2 Any excess
credit is refundable.3 In computing their taxable
income for New York State personal income tax purposes, the credit
is added back to a partner’s or shareholder’s income. Thus,
from a New York State personal income tax perspective, the net
effect of the Pass-Through Entity Tax should be approximately the
same as if the election to pay the tax were not made (see example

The major difference, however, is that the Pass-Through Entity
Tax is designed to be deductible for federal income tax purposes.
Soon after the TCJA imposed the SALT cap, states began to consider
possible workarounds that would restore some or all of the benefit
of the state and local tax deduction. On Nov. 9, 2020, the IRS
issued Notice 2020-75 (the Notice), announcing its
intention to issue regulations that would approve of one such
workaround. The Notice explains that an amount paid by a
partnership or S corporation to a state (or subdivision thereof) to
satisfy its income tax liability is deductible in computing the
entity’s federal taxable income, and that such payments are not
taken into account in applying the SALT cap to any partner or
shareholder of such an entity. Moreover, this treatment does not
depend on whether the tax is deductible or creditable, or if a tax
benefit is otherwise available, to the partners or shareholders of
an electing entity. Taxpayers are entitled to rely on the Notice
until proposed regulations are issued addressing the same


The Pass-Through Entity Tax is imposed for each taxable year on
the taxable income of every electing partnership and S corporation
at the following marginal rates: 

Pass-through entity taxable income

Marginal rate

Not over $2 million


Over $2 million but not over $5 million


Over $5 million but not over $25 million


Over $25 million



A partnership with two partners elects to pay the Pass-Through
Entity Tax for calendar year 2022. The partnership has $2 million
of income, on which it pays $137,000 of Pass-Through Entity Tax.
Each partner’s distributive share of partnership income is
$931,500 for federal income tax purposes ($1 million less a
deduction of $68,500 of Pass-Through Entity Tax). Each partner
receives a credit under New York tax law of $68,500, and this
amount is included in each partner’s New York adjusted gross
income. Thus, each partner has $1,000,000 of partnership income for
New York tax purposes, on which they each pay New York State
personal income tax at a rate of 6.85% (assuming no deductions or
other modifications), or $68,500. Each partner would receive a
credit of $68,500, resulting in no additional tax due.

Election and Payment

The election is made annually and must be made by the due date
of the first estimated payment of the tax, and once made is
irrevocable for the calendar year. An electing partnership or S
corporation must pay the Pass-Through Entity Tax in four equal
installments on March 15, June 15, September 15 and December 15 in
the calendar year prior to the due date of the required return.
Returns for the Pass-Through Entity Tax must be filed on or before
March 15 following the close of the taxable year.

For calendar year 2021, the election to pay the Pass-Through
Entity Tax must be made by Oct. 15, 2021, and an electing entity is
not required to make estimated payments for taxable year 2021.
Partners, members or shareholders of electing entities should make
estimated payments for 2021 as required by the personal income tax
as though not entitled to the credit for the Pass-Through Entity
Tax for such year.


1.An eligible partnership is any
entity treated as a partnership for federal income tax purposes
that has an obligation to file a New York State income tax return,
and an eligible S corporation is any entity treated as a New York S

2.Each partner’s or
shareholder’s share of the tax is the portion of the tax that
is allocable to the partner or shareholder in computing their share
of the partnership’s or S corporation’s taxable

3 A New York resident is
allowed a credit against any substantially similar tax of another
state, provided that such state also imposes a substantially
similar income tax. In determining whether the election should be
made, consideration should be given to whether nonresident partners
would receive a credit for New York’s Pass-Through Entity Tax
from their state of residence.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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