In response to the federal cap on state and local tax (SALT) deductions introduced by the 2017 Tax Cuts and Jobs Act, New York State implemented the Pass-Through Entity Tax (PTET)—a strategic workaround designed to preserve tax benefits that can be leveraged by freelance business owners. Enacted in 2021 under Article 24-A of the New York Tax Law, the PTET allows eligible partnerships and S corporations to pay state income taxes at the entity level, enabling individual owners to claim a federal deduction that would otherwise be limited.
What Is the PTET?
The PTET is an optional tax that eligible pass-through entities—such as partnerships and New York S corporations—can elect to pay annually. By doing so, the entity pays income tax on behalf of its owners, who then receive PTET credit on their personal New York State income tax returns.
This election shifts the tax burden from the individual to the entity, allowing the business to deduct the full amount of state taxes paid on its federal return. This is particularly beneficial in light of the $10,000 SALT deduction cap imposed on individuals.
Who Can Elect?
Any partnership or S corporation doing business in New York may opt in, provided it is not a disregarded entity, such as a single-member LLC (filing a 1065 return) unless it elects S corp treatment (filing a 1120S return). The election must be made each year online through the entity’s Business Online Services account between January 1 and March 15 of the tax year.
How It Works
The PTET is calculated based on the entity’s taxable income attributable to New York. For partnerships, this includes the distributive share of income for resident partners and New York-sourced income for nonresidents. S corporations calculate PTET based on income allocated to New York shareholders.
Once elected, the entity must make estimated payments and file a PTET return. The election is irrevocable after the due date of the first estimated payment.
Benefits and Considerations
The primary benefit is the federal deductibility of state taxes paid at the entity level, which can result in significant tax savings for owners. In its first year, New York collected over $16 billion in PTET payments, signaling strong adoption and potential benefits.
It should also be noted that there may be changes in this SALT workaround in 2027 based on Trumps proposed tax bill which calls for the elimination of the deductibility of state pass-through entity taxes (or PTETs for those business owners who qualify for the Qualified Business Income (QBI) deduction.
The bottom line? Entities must carefully evaluate whether the election is advantageous, especially if they have nonresident owners or operate in multiple states. The timing of the election—well before tax season—can also be a challenge for businesses unsure of their year-end tax position.
Final Thoughts
New York’s PTET offers a valuable tool for mitigating the impact of the SALT cap, but it’s not a one-size-fits-all solution. Business owners should consult with tax professionals to assess whether opting in aligns with their broader tax strategy.
