May 3, 2021

New York Enacts Pass-Through Entity Tax

By Barry Halpern, Partner, Tax & Business Services & Liliana AbouRafeh, Director, Alternative Investment Group

New York Enacts Pass-Through Entity Tax State & Local Tax

On April 19, 2021, the New York State Fiscal Year 2021-22 budget bill was signed by Governor Andrew Cuomo. Included in the final bill is Article 24-A, Pass-Through Entity Tax, an electable tax on pass-through entities, effective for tax years starting on or after January 1, 2021, providing that eligible partnerships and S corporations with a New York filing requirement have the option to pay an entity-level tax at graduated rates.


The New York Pass-Through Entity Tax (PTET) provides certain individual taxpayers a viable workaround of the 2017 Tax Cuts and Jobs Act’s $10,000 State and Local Tax (“SALT”) deduction limitation. With this new legislation, New York becomes the tenth state to enact such an elective tax, joining Alabama, Arkansas, Idaho, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin, while Connecticut’s tax is mandatory. (More states are expected to enact such legislation since the IRS released guidance in November 2020, essentially approving this mechanism for circumventing the SALT deduction.)

An eligible pass-through entity, such as a partnership or New York S corporation, can elect to be subject to a tax at the entity level. (An eligible pass-through entity excludes publicly traded partnerships, but includes limited liability companies taxed as either partnerships or S corporations.) The tax is deductible on the eligible pass-through entity’s federal tax return and reflected on the individual partner’s or shareholder’s income or loss reported on a Schedule K-1. To avoid double taxation, the state would then provide partners and shareholders of eligible electing pass-through entities a tax credit against state personal income tax for their share of the PTET, thereby circumventing the federal state and local tax cap. These provisions take effect immediately and apply to all tax years beginning on or after January 1, 2021.


  • A partnership that has a filing requirement because of a New York resident partner is eligible to make the election. An S corporation with resident shareholders does not have a filing requirement unless it is doing business in New York.
  • A New York S corporation that is subject to tax because of the state’s economic nexus rules (sales of at least $1 million) appears to be eligible to make the election.
  • S corporations that are mandated to be treated as New York S corporations because of investment income of more than 50 percent of federal gross income for the year are permitted to make the PTET election if there is nexus within New York.



Generally, the irrevocable annual election must be made by the eligible pass-through entity by the due date of the first estimated quarterly payment (March 15).

For the 2021 calendar year the election must be made by October 15.


The election may be made by the following eligible individuals:

  • S corporation – any officer, manager or shareholder who is authorized to make the election.
  • Other entities – any member, partner, owner, or other individual with authority to bind the entity or sign returns.


  • The statute does not directly address when the election is required for fiscal year taxpayers except that the election must be made by the due date of the first estimated tax payment. It is our understanding that the election will be required by March 15 for both fiscal and calendar year pass-through entities.


  • For 2021, the pass-through entity will not be required to make estimated payments.
  • For tax years after 2021, estimated tax payments must be paid in four equal installments and are due by the 15th of March, June, September and December.
  • The required annual payment is based on the lesser of 90% of the tax for the taxable year or 100% of the tax in the preceding taxable year.
  • Short period returns will be subject to estimated payments in accordance with procedures established by the Commissioner.


  • The statute does not distinguish between calendar year taxpayers and fiscal year taxpayers.
  • It appears that fiscal year filers would still have requirements to make estimated payments on the 15th of March, June, September, and December prior to the year of the due date.
    • Estimated payments for fiscal year taxpayers will pair up the due dates for estimated tax payments with that of an individual calendar year taxpayer. This can result in a fiscal year pass-through entity having to make its first estimated payment (and election) after the close of its fiscal year.
  • Since estimated payments are not required in 2021, guidance will be needed as to whether estimated payments made at the partner, member or shareholder level can be transferred to the entity.


An electing partnership’s or electing S corporation’s taxable year is the same as the taxable year for federal income tax purposes.


The tax is imposed on the electing pass-through entity’s taxable income.

  • In the case of an electing partnership, pass-through entity taxable income for New York purposes is the sum of all taxable income attributable to each resident partner and New York-sourced income attributable to each nonresident individual partner.
  • In the case of an electing S corporation, only amounts derived from or connected with New York sources, to the extent they would have been included in the taxable income of shareholders, are subject to tax.
  • There is joint and several liability for certain partners/members of the PTET (i.e., partners or shareholders that own more than 50% or more of the interest or profits of the electing pass-through entity, general, managing or controlling partners or shareholders).
  • All partners/members are severally liable for the PTET to the extent tax is not paid by the electing partnership or electing S corporation for their direct share of the PTET.


  • New York’s definition of pass-through taxable income is different for S corporations (only includes New York State sourced income) vs. partnerships (which includes the sum of total taxable income allocated to resident partners and New York-sourced income to nonresident partners).
  • New York includes income allocated to resident partners. This would seem to include the portions of income allocated to other jurisdictions as well.
  • The intention of the Department was to include the New York source income of all New York S corporation shareholders since there are no special allocations for S corporations.
  • New York sourcing rules may be different for partnerships vs. S corporations. Accordingly, the New York sourced tax base for the PTET appears to be affected by entity type.
  • New York is including the income only of partners that are subject to tax under Article 22. Accordingly, the income of corporations or other pass-through entities in a tiered structure do not seem to be included in the PTET.


The tax is imposed at a graduated rate as follows:

PTE taxable income Tax Rate
Not over $2 million 6.85%
$2 million but not over $5 million $137,000 plus 9.65% (over $2 million)
$5 million but not over $25 million $426,500 plus 10.30% (over $5 million)
Over $25 million $2,486,500 plus 10.90% (over $25 million)


An individual taxpayer who is a direct partner or member in an electing partnership or a direct shareholder of an electing S corporation subject to the PTET may claim a credit against such partner or shareholder’s New York personal income tax return.


  • The credit is computed as the portion of PTET paid by the electing partnership or S corporation on taxable income that is also included in the taxable income of the entity’s partners, members or shareholders.
  • If a taxpayer receives pass-through entity tax credits from multiple electing partnerships and/or electing S corporations, the sum of the credits may be used to offset any tax due on the individual taxpayer’s return.
  • If the credit exceeds the personal income tax due, the excess will be treated as an overpayment to be credited or refunded without interest.


In order for the PTET credit to be claimed, the following must occur:

  • The electing partnership or electing S corporation must have paid the PTET.
  • The aggregate amount of credits claimed by partners, members or shareholders of an electing partnership or S corporation should not exceed the total tax due from the entity.
  • A partner, member, or shareholder must be a direct partner, member, or shareholder to be subject to this tax credit.
  • A partner, member, or shareholder may not claim a PTET credit that exceeds the portion of PTET credit reported for such partner/shareholder by the eligible pass-through entity.


A resident individual will also be permitted a credit against any tax due, equal to their share of any PTET imposed by other states and jurisdictions, so long as it is substantially similar to the PTET imposed by New York State and such state also imposes an individual income tax.


  • Many states have enacted a tax similar to PTET, but there may be some differences in how they are applied. For example, in Connecticut, the PTET is mandatory and corporate or tiered partner types could be included. In other states, a non-resident is not required to file a state return if the income is included in a PTET return. Clarification may be necessary.
  • Residents are not likely to receive a credit for taxes paid to other states with an entity-level tax but no personal income tax (such as Texas or Tennessee).
  • Through informal discussions, it is our understanding that even if a pass-through entity does not make the PTET election in New York, a resident partner can still take the PTET credits from other substantially similar states against their New York tax liability.


The PTET return itself is due March 15 following the close of the calendar year containing the final day of the entity’s taxable year (regardless if the pass-through entity is a calendar or fiscal year taxpayer).

The Commissioner can grant an extension of time to file any return, statement or other document, not to exceed six months. Additionally, a return filed by an electing partnership or S corporation may not be amended unless the Commissioner consents or authorizes the amendment.


The pass–through entity return must include a certification by an authorized individual to act on behalf of the electing partnership or S corporation, stating that the pass-through entity made a timely and valid election and that all statements contained therein are true.


With the IRS’s allowance of programs such as PTET we may begin to see more states enacting a pass-through entity tax. Along with the passage of such programs, there are many items to be considered, such as whether non-resident partners will receive a credit in their home states, whether the election will be revocable, whether all members need to elect to be part of the pass-through entity tax, what is included in the base taxable income, and how the benefit gets allocated and affects different partners.

Pass-through entities should analyze the PTET rules in each relevant state to determine whether it will be beneficial to make the election, and should consult their tax advisors before making any election.

For additional information regarding how the PTET rules may affect you, please contact your Marcum State and Local Tax professional.