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NYS Addresses Limitation on SALT Deduction for Pass-Through Entity Owners

The federal limitation on the deductibility of state and local taxes (SALT) negatively impacts New Yorkers, especially the owners of pass-through entities (PTEs), e.g., partnerships and S corporations. Those owners are limited on the SALT deductions for state tax payments they’ve made that are attributable to the income from PTEs.

However, there’s good news: part of the fiscal year 2022 New York State budget includes a workaround which effectively allows New York State PTE owners a deduction for taxes owed on income generated by the PTE. This will be done by having the PTE make quarterly estimated NYS tax payments and having the PTE deduct those payments directly. So, the owner’s federal itemized deductions will not be increased by the SALT deduction—however, the net income of the PTE reported to the owner will be reduced by the SALT deduction. Mechanically, the PTE owners will report the PTE income on their NYS tax return, but they’ll also take a credit for the taxes paid by the PTE.

The budget is brand new and we are waiting for much needed additional guidance. This is what we know so far:

  • For years 2022 and later, an election will be made by the first estimated payment (March 15th) and the PTE will make the estimated payments. Total tax paid must be 90 percent of current year tax due or 100 percent of prior year tax. The estimated tax payments will be treated as a credit on each owner’s individual New York State tax return. The PTE will pay the tax and disclose credit recipient information (SSN) and allocated credit amount for each owner to claim the credit.
  • For 2021 only, PTE owners should continue to make their individual estimated tax payments and the PTE is not required to make estimates. It appears that for 2021 only, the PTE will compute the tax due and provide the information to the investors to claim the credit by factoring in the amounts the owners paid in individually.
  • This applies only to taxable PTEs. A disregarded entity, including a proprietor who reports on Schedule C, will not be allowed to take advantage of this election, however, the individual owners who invest into a PTE through a disregarded entity, are able to use the credit.

The tax rate for the FTE will be graduated as follows:

Tax Rate for NYS SALT Deduction

Other highlights of the new budget provision: There will be joint and several obligations that the owners have on the payments due by the PTE. Excess credits will be treated as overpayments by owners and, therefore, will be refundable. Only one election will be allowed per year and the election is irrevocable. And there will be resident credits available but apparently only with states with similar PTE tax regimes.

Our experts are here to help. Please contact a member of the Bonadio Tax Team if you have any questions.

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