Quick answer: New York's pass-through entity tax (PTET) lets a partnership or S corporation elect to pay New York income tax at the entity level, deduct it on the federal return, and pass a matching New York credit through to the owners. It can lower the owners' federal tax because the entity's deduction is not subject to the individual state and local tax (SALT) deduction cap. The election is made each year by March 15, and whether it pays off depends on the owners' incomes, residency, and how much SALT deduction they can already take.
Since New York created the PTET, it has become one of the more valuable planning tools for business owners, and also one of the easier ones to get wrong. We walk many Central New York partnerships and S corporations through the decision every winter. Here is how we think about it.
Why the PTET exists
The federal itemized deduction for state and local taxes is capped for individuals. For an owner of a profitable business in New York, the state income tax on business profits alone can exceed that cap, which means part of the state tax produced no federal benefit.
In 2020 the IRS announced in Notice 2020-75 that state income taxes paid by a partnership or S corporation at the entity level are deductible by the entity in computing its income. New York, like many states, responded by creating an elective entity-level tax. The entity pays the tax and deducts it federally, and the owners receive a New York credit to offset their personal state tax on the same income.
The 2025 federal tax law raised the individual SALT cap for several years, with a phase-down for higher incomes, and left the entity-level deduction in place. That changes the math for some owners, which is one reason to revisit the decision each year rather than assuming last year's answer still holds.
Who can elect
Eligible entities include:
- Partnerships, including LLCs taxed as partnerships, and
- New York S corporations (federal S corporations that have also made the New York S election).
Single-member LLCs that are disregarded for tax purposes and sole proprietorships cannot elect, because there is no separate entity to pay the tax. Publicly traded partnerships are also excluded. New York City has its own companion PTET for city-resident owners of S corporations and partnerships that also elect the state PTET.
How the election works
- Make the election by March 15 of the tax year through the entity's New York Online Services account. The election must be made by an authorized officer, partner, or member, and it is irrevocable for that year. Missing the deadline means no PTET for that year; there is no late election relief.
- Make estimated payments during the year. PTET estimates are generally due March 15, June 15, September 15, and December 15. Underpaying can affect penalties and, in some cases, the owners' credit timing.
- File the PTET return after year end, reporting the entity's taxable income and the tax due.
- Pass the credit through to owners on their New York schedules so they can claim it on their personal returns.
The PTET is computed at graduated rates on the entity's income that is taxable by New York. For resident owners that is generally all of their distributive share; for nonresident owners, only the New York-source portion. The rate schedule is published by the Tax Department, and the top rates apply to higher levels of income.
When electing usually makes sense
In our experience, the PTET tends to be worth it when:
- The owners are already at or over the federal SALT cap from property taxes and other state income taxes.
- The owners itemize, or would not benefit much from the SALT deduction in any case.
- The business is consistently profitable and New York income is significant.
- All or most owners are New York residents, so the credit lines up neatly with their personal New York tax.
When it may not be worth it
There are real reasons to pass:
- Owners who take the standard deduction and have room under the SALT cap may gain little.
- Nonresident owners in states that do not give credit for New York PTET paid on their behalf can end up worse off.
- Cash flow. The entity has to pay the tax during the year, which may strain a business with uneven income.
- Uneven ownership situations. For S corporations, the tax must be applied in a way that does not create disproportionate distributions, which could put the S election at risk. Partnership agreements may need to address how the payment is allocated.
- Losses or low income. If the business is near break-even, there may be nothing to gain.
It also affects the federal picture in less obvious ways. The deduction reduces the entity's ordinary income, which can affect the qualified business income deduction and other income-based calculations. These interactions are why we run the numbers both ways before recommending an election.
Practical steps for the coming year
Because the election is due March 15, the conversation really needs to happen in the fall or early winter. Start by gathering last year's returns for the entity and each owner, a reasonable projection of this year's profit, and each owner's state of residence. If you work with us on your business and corporate taxes, we build the PTET analysis into year-end planning. It pairs naturally with the steps in our article on year-end tax planning for businesses.
Frequently asked questions
What is the deadline to elect New York PTET?
The annual election is due by March 15 of the tax year for which you want it to apply. It is made online through the entity's New York Online Services account and cannot be made late or revoked once the deadline passes.
Do I still get a credit on my personal New York return?
Yes. Each owner receives a credit for their share of the PTET the entity paid, and it is claimed on the owner's New York personal return. If the credit exceeds the owner's New York tax, the excess is generally refundable or can be credited forward.
Can a single-member LLC elect PTET?
Generally no. A single-member LLC that is disregarded for federal tax purposes is not a separate taxpayer, so it cannot make the election. If the LLC has elected to be taxed as an S corporation and has made the New York S election, it can.
Is the PTET worth it for a small business?
Sometimes. The benefit depends on whether the owners are limited by the SALT cap, whether they itemize, and how much New York tax the business generates. For some smaller businesses the savings are modest; for others they are meaningful. Running a side-by-side projection is the only reliable way to know.
This article is general information for 2026, not tax or legal advice for your situation. Tax rules and figures change; confirm current amounts with the IRS, New York State, or your accountant before acting.
Related service: New York State Tax