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April 19, 2021

New York State Lawmakers Finally Agree to SALT Workaround

The New York State legislature and NYS Governor Cuomo reached an agreement for the fiscal year 2021–2022 state budget. The assembly and senate have passed the budget legislation, and the legislation has been delivered to the governor for signature.

A major part of the budget legislation is a new “pass-through entity tax” that is specifically designed as a workaround for the federal limitation on the deductibility of state and local taxes (SALT), which was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA).

Under the TCJA, individual married taxpayers (filing jointly) who choose to itemize their federal deductions in arriving at taxable income are limited to deducting only $10,000 of their state and local real property and income taxes (SALT limitation).

The IRS issued Notice 2020-75 in November 2020 to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation, and that these payments are not taken into account when applying the SALT limitation to any partner or shareholder of this kind of entity.

Designed to comply with the IRS notice, the New York budget legislation allows eligible partnerships and New York State S corporations to elect to pay tax on their taxable income for taxable years beginning after December 31, 2020, (the pass-through entity tax). The pass-through entity tax is deductible by the partnership or New York State S corporation for federal tax purposes, which reduces the allocable share of federal taxable income reported by individual partners or shareholders. This reduction in taxable income has the intended effect of putting the partners or shareholders in a similar position as if they were allowed to deduct their state income taxes imposed with respect the partnership or New York State S corporation income without regard to the SALT limitation.

For New York State income tax purposes, the partners and shareholders of the electing entity are allowed to claim a credit against their New York State personal income tax liability for their share of the entity-level tax paid. Any excess credit is refundable. However, to ensure that the partners and shareholders are not receiving a benefit of being allowed to deduct the pass-through entity tax for New York State income tax purposes, the credit is added back to a partner’s or shareholder’s income for purposes of calculating the New York State personal income tax of the partner or shareholder (i.e., as if the election had not been made).

The pass-through entity tax is imposed for each taxable year on the taxable income of every electing partnership and S corporation at rates varying from 6.85 percent to 10.90 percent depending on the taxable income of the entity.

The election is made annually and must be made by March 15 of the year for which the election is to apply and, once made, is irrevocable. 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.

Given that the provisions of the pass-through entity tax are effective for calendar year 2021 (and the provisions will not be enacted until after the first quarter of 2021), a special rule applies for the election to pay the pass-through entity tax for 2021. Under this special rule, an election must be made by October 15, 2021, and an electing entity is not required to make estimated payments for taxable year 2021, but must pay the pass-through entity tax by December 31, 2021. Partners or shareholders of electing entities are required under the law to continue making their estimated tax payments for 2021 as though they were not entitled to the credit for the pass-through entity tax for the year.

The pass-through entity tax represents a welcome tax planning opportunity for New York State individual taxpayers given that these taxpayers were traditionally among those with the highest average federal deductions for state and local taxes before the implementation of the SALT limitation. This new legislation is better late than never since several states other than New York have already enacted legislation offering an entity tax as a workaround to the SALT limitation.

If you have any questions regarding the content of this alert, please contact Nick Scarfone and Gerry Stack, co-chairs of the Tax Practice Area, at and, respectively, or another member of the firm’s Tax Practice Area.


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