As anyone who lives in New York State and pays income taxes knows, for tax years beginning after 2017, Taxpayers were limited to a deduction of $10,000 itemized state and local tax on their federal income tax returns. Known as a “SALT” deduction, the $10,000 limitation adversely affected individuals in high tax states such as New York, who often saw substantial increases in what they owed in federal income tax.
To work around the SALT limitation, several states, including New York, have enacted a Pass-Through Entity Tax. New York’s Pass-Through Entity Tax was signed into law at the end of April, and enables qualifying pass-through entities to afford their owners a means to fully deduct their New York State Income Taxes. The tax is imposed on pass-through entity taxable income at the current NYS personal income tax rates. Of course, there are income limits, eligibility requirements, and the election must be made timely each year for taxable years beginning after January 1, 2021. It is generally applicable to partnerships, LLCs treated as partnerships for federal income tax purposes, and New York S Corporations, including LLCs treated as S Corporations for federal income tax purposes that make the New York S Corporation election. For 2021, the deadline is October 15, 2021.
As with any new legislation, there are nuances, and everyone’s situation is different. If you have any questions or want to better understand how this legislation applies to your specific situation, please do not hesitate to contact us.