If you itemize deductions on your federal tax return, you’ll recall that the 2017 tax law changes imposed a $10,000 cap on the amount of state income and property taxes (SALT) that you could deduct on your federal return. For many New York State taxpayers, this greatly reduced their federal itemized deductions and potentially forced them to take the standard deduction instead.
To reduce the impact of the SALT cap, New York enacted a new law allowing owners of certain entities, including multi-member LLCs and S-corps, to deduct a larger portion of their NYS income taxes paid against their federal income than previously eligible.
The new law essentially allows an eligible entity to elect to pay a new pass-through entity tax (PTET) directly to New York on behalf of the owner(s). The tax paid is treated as a business expense that reduces the income reported on the taxpayer’s K-1 – effectively lowering the amount of income reported on your federal return by the amount of the entity tax paid.
The new tax is optional, and entities must make an annual election by March 15th to be subject to the tax each year – for 2021, that election is October 15th. Owners of eligible pass-through entities should reach out to their accountants or their Rockbridge advisor with questions on how this new law may impact your tax situation.