August 18, 2021
Taxes have long been the bane of New York taxpayers. But a lack of federal legislation repealing the State and Local Tax (SALT) cap has been especially onerous. Federal law dictates that only $10,000 may be deducted in a SALT deduction on Form 1040, providing undue pressure on those living in high-paying states, like New York and New Jersey, where a taxpayer’s combined property and state income tax can easily exceed that limit.
In response, several states, including New York, New Jersey, and Connecticut, now allow for certain taxpayers to take advantage of a special tax break to mitigate the effects of the SALT cap by providing a break to qualified passthrough entities. The move is the latest attempt by states to address the cap, though there is still significant chatter at the federal level about the possibility of lawmakers repealing the SALT cap in the future.
Until then, New Yorkers can take advantage of the aforementioned workaround, which we’ve outlined below. And as always, if you have specific questions about your unique circumstance and how we can help you reduce your federal tax burden, feel free to contact a Perlson LLP professional at 516-541-0022 to discuss.
What is the SALT Cap?
Under current federal law, $10,000 is the maximum amount individuals may deduct on their itemized deductions for state and local taxes, regardless of filing status. The SALT Cap, which is slated to remain in effect through the 2025 tax year, is especially troublesome for those living in high-tax states like New York where state and local taxes can quickly exceed that amount. Prior to the SALT cap’s implementation in tax year 2018, taxpayers were allowed to deduct all of the state and local taxes they paid on their federal itemized deductions.
Which Companies Qualify and What Is New York State’s Plan?
S-corporations and LLCs treated as S-corporations as well as partnerships and LLCs treated as partnerships qualify for the new passthrough entity tax (PTE). The entity pays the New York State income tax on its taxable income and receives a deduction for the tax paid. The individual partner or shareholder reports the reduced taxable income for federal tax purposes.
Here’s how it works: For New York State tax purposes, the partners and shareholders report the reduced taxable income, plus they must add back the New York State tax paid by the entity to their New York State taxable income. They receive a credit on their New York State income tax return for the taxes paid by the entity so that when the dust settles, they have received a federal deduction for the New York State tax paid.
Late last year the Internal Revenue Service ruled that such a workaround would qualify as an acceptable tax deduction. New York State will allow a credit for taxes paid to other states that have a PTE similar to New York State.
While the plan is a boon for shareholders of pass-through entities, it’s not necessarily a true solution for all New Yorkers (or those living in other high-taxed states). Highly paid individuals who are employees at companies and still pay SALT at higher than $10,000 cannot take advantage of the bill.
When Can You Sign Up?
If you’re a qualified PTE, you must make an election by the date of the first estimated tax payment which is 3/15. For 2021, the election is due 10/15. The election is made annually and is irrevocable for the particular year. Estimated payments must be paid by the entity, but for 2021 they are not required.
Looking for a True Solution
Although New York State lawmakers are trying to address the SALT cap, so far, little has been done to actually address it for all taxpayers. Several lawmakers from both New York State and other states have floated bills to eliminate the SALT cap, but as of this writing, no bill has passed and been signed into law.
The election to pay the PTE is not always an easy decision especially when there are partners or shareholders in different New York State income tax brackets. The PTE tax rate starts at 6.85% while the personal New York State tax rate starts at 4%. We encourage you to reach out to your Perlson LLP professional as soon as possible to discuss the matter and find the right solution for you.