New York State Price range Settlement Features a Cross-By way of Entity Tax as a SALT Workaround

On Wednesday, April 7, 2021, the New York Legislature reached an agreement with Governor Andrew Cuomo for the fiscal year 2021-2022 state budget. 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 TCJA).

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 below).

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 topic.


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:

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.