Articles & Alerts
Breaking Through the SALT Barrier: PTET Insights for Multi-State Law Firms
As we approach key PTET election deadlines and navigate complex, jurisdiction-specific rules, understanding how these regimes operate—and when and how to elect into them—has never been more important. This article outlines the latest developments in PTET regimes across several key jurisdictions, provides critical deadlines and compliance considerations, and offers planning insights specifically tailored to law firms and other professional services entities operating in multi-state environments.
The $10,000 cap on the deductibility of state and local taxes (SALT), introduced under the Tax Cuts and Jobs Act (TCJA) in 2017, significantly impacted taxpayers—particularly those in high-tax jurisdictions. For pass-through entities and their owners, the limitation led to increased federal tax liabilities and prompted a wave of state-level legislative responses aimed at mitigating the effect of the cap.
To mitigate the impact of the $10,000 SALT deduction limitation, many states have implemented workaround strategies—most notably through the adoption of pass-through entity tax (PTET) regimes, which impose a deductible, entity-level tax on pass-through entities (PTEs). Here, the pass-through entity pays a deductible tax that reduces the federal income passing through to the owners. The owners in turn, receive a credit on their individual state tax returns offsetting the tax liability due on the pass-through income. Partners in partnerships receive an additional benefit as the PTET is deductible for self-employment tax.
In November of 2020, the IRS issued Notice 2020-75, clarifying that PTE’s are entitled to a deduction equal to the taxes paid to a state under a PTET regime. This applies even where the partner or shareholder would receive a credit of up to 100% to offset their individual state tax liabilities. Today, some 36 states and New York City have passed or proposed their own PTET regime, including California, Connecticut, Massachusetts, New Jersey, New York and New York City, to name a few. Each jurisdiction has their own eligibility requirements to participate, different methods of calculating the PTET and utilizing the PTET credits including their limitation in filing composite tax returns.
New York State (NYS) PTET: To participate in NYS’s PTET for 2025, the pass-through entity was required to file an election prior to March 17, 2025. (Note, in her most recent NYS budget proposal, the Governor proposed extending the election deadline to September 15th. However, it appears that the Legislature has not adopted that in the final budget.) NYS has different methods of calculating the PTET for a partnership, a “resident S corporation” (with all NYS resident shareholders), and a S corporation NYS nonresident shareholders. Partners and shareholders who receive an allocation of the NYS PTET credit will be able to offset their NYS (and NYC if applicable) total tax liability (including on non-PTE income) with any excess eligible to be refunded. Please refer to our earlier Anchin Alert for more details on the NYS PTE: (https://www.anchin.com/news/anchin-alert-new-york-provides-clarity-on-the-new-pass-through-entity-tax-an-opportunity-for-tax-savings).
New York City (NYC) PTET: The NYC PTET is only available for partnerships to NYC resident partners and S corporations of which all shareholders are NYC residents. Nonresidents of NYC will not receive any benefit under the regime because the NYC personal income tax only applies to City residents. The NYC election is available online; however, opting into the NYS PTET is required to be eligible for NYC’s PTET election. (Note, residents are defined for both the NYS and NYC regimes as living in NYS or, City for over 6 months.) Please refer to our earlier Anchin Alert for more details on the NYC PTE Tax: (https://www.anchin.com/articles/official-guidance-on-the-nyc-pass-through-entity-tax/).
New York State and New York City: For both the NYS and NYC PTET regimes, estimates must be made in 4 equal quarterly installments based upon 100% of the prior year liability, or 90% of the current year liability. Annualization is not allowed within the PTET regime which creates significant challenges for firms with fluctuating income throughout the year. This means that even if a firm had a loss in the first quarter, 25% of the required estimate still must be paid.
California: California allows the PTET election to be made on the entity’s tax return. Firms electing CA PTET must make two payments. The first payment is for the greater of 50% of the PTET paid for the prior year or $1,000, and must be paid by June 15th of the taxable year for both calendar year and fiscal year pass-through entities. The second payment is due by the PTE’s original filing deadline without extensions. If the June 15th payment was underpaid or not paid, the entity is not eligible to make the election for the current tax year. There are currently no exceptions to this rule, even if an entity anticipates its 2025 PTET liability to be less than 50% of its 2024 liability. (Note, a change to this requirement has been proposed but not passed as of the publication date.) Please refer to our earlier Anchin alerts regarding the CA PTET for more details: (https://www.anchin.com/articles/what-you-need-to-do-now-to-be-eligible-for-californias-2022-ptet/, https://www.anchin.com/articles/will-you-benefit-from-the-expansion-of-the-pass-through-entity-tax-ptet/)
New Jersey: Also known as the Business Alternative Income Tax (BAIT): Under BAIT, a partnership’s distributive income upon which the tax is computed includes both in-state and out-of-state income for resident partners. Under BAIT, the PTE does not need to make nonresident withholding payments on behalf of a nonresident partner if the nonresident expects a refund of the withholdings as a result of the BAIT credit. Finally, a BAIT credit will be permitted for tiered partnerships and S corporations that are partners in partnerships. Such credits can be passed through to the partners or shareholders or applied against the tax liabilities of the partnership or S corporation and its BAIT liabilities. For additional information on these NJ changes, please see our Anchin Alert: (https://www.anchin.com/articles/new-jerseys-bait-updates-provide-an-even- greater-tax-benefit/).
The SALT deduction cap of $10,000 is set to expire at the end of 2025. At present, several legislative proposals exist to increase the cap. However, dependent upon the amount, an increase may be cost prohibitive. We are paying close attention to any new legislation to see how it could impact PTET regimes. Currently, the PTET in ten states is sunsetting as of December 31, 2025 in lockstep with the TCJA, and only five of these regimes would continue if the SALT cap is extended or raised. Consequently, it is important to continue monitoring federal and state legislation as the year progresses.
Law Firm Economics: While the benefits of the PTET can be significant, before deciding to make a PTET election, careful consideration should be given to where the owners live from an economic perspective. Consider a NYC based firm with NJ owners. If the firm elects into NJ’s BAIT regime, they could be paying in 200% of state tax for the NJ residents which could create significant cash flow issues for both the firm and those owners.
Further, one should factor in potential PTET refunds which are generally taxable for federal income tax, as well as the economics of opting in specifically due to the rate differential between the PTET and the partners’ individual income tax rates.
*Practice Tip: Firms should be certain their operating agreements provide for the flexibility necessary for the PTET regimes. Planning should be done in advance to address withholding from partner/shareholder distributions to facilitate payments of PTET estimated taxes and the timing related thereto, and finally, true ups will be needed upon the filing of the actual PTET returns based upon individual credits versus deductions.
For more information, please contact Steven Lando, Tax Partner and Co-Leader of the Law Firm Group, or Deborah de Vries, Partner and Co-Leader of the Law Firm Group.