What the PTET Actually Is — and Why New York Created It

Back in 2017, the Tax Cuts and Jobs Act capped state and local tax (SALT) deductions at $10,000 per return under IRC §164(b)(6). For a New York business owner paying state income tax on $500,000 of pass-through income, that cap turned a roughly $34,000 state tax deduction into a $10,000 one overnight. The remaining $24,000 became a dead cost — real taxes paid, no federal deduction.

New York’s response was the pass-through entity tax, enacted in 2021 under New York Tax Law Article 24-A. The idea is straightforward: instead of the individual partner or shareholder paying state tax on their share of business income and hitting the SALT cap, the entity itself pays the tax. Entity-level state taxes aren’t subject to the SALT cap because they’re a business expense, not an itemized deduction. The IRS signed off on this approach in Notice 2020-75, confirming that entity-level state taxes are deductible by the entity without limitation.

Here’s the part that surprises people: the individual still gets a dollar-for-dollar credit against their New York personal income tax for the PTET paid by the entity. So the tax burden doesn’t increase — it shifts from the individual level (where it’s capped) to the entity level (where it’s fully deductible). The net effect is that the SALT cap effectively disappears for qualifying pass-through income. (For more on how pass-through income is taxed federally, see our guide on the qualified business income deduction.)

Who Qualifies for the NY PTET

Not every business can elect into the PTET. The entity must be one of these:

• Partnerships — General partnerships, limited partnerships, and LLPs that file as partnerships for federal purposes
• S Corporations — Entities with a valid federal S election in place
• LLCs taxed as partnerships or S corporations — The LLC itself doesn’t qualify by default; it depends on the federal tax classification

Sole proprietorships can’t elect PTET. Neither can single-member LLCs that are disregarded for tax purposes — there’s no entity-level return to attach the election to. If you’re operating as a sole proprietor and want access to entity-level tax deductions, that’s a conversation about restructuring into an LLC or S corporation.

One thing worth noting: the entity must have at least one member, partner, or shareholder who is an individual, estate, or trust subject to New York personal income tax. A partnership where every partner is a C corporation doesn’t qualify. That said, most small and mid-size pass-throughs in New York meet this test without any issue.

Making the Election — Deadlines and Form IT-204-IP

The PTET election is annual and irrevocable for the tax year. You can’t wait until you file to decide — the election must be made by March 15 of the tax year. For tax year 2026, that means the election deadline is March 15, 2026. Miss that date and you’re locked out for the entire year.

You make the election through the entity’s Online Services account with the New York Department of Taxation and Finance. It’s not a paper filing — it has to be done electronically. The authorized person (typically a partner, officer, or member with authority to bind the entity) logs in, selects the PTET election, and confirms.

What About Form IT-204-IP?

Form IT-204-IP is the partner’s or shareholder’s information schedule, attached to the partnership or S corp return (IT-204 for partnerships, CT-3-S or CT-34-SH for S corps). After the entity pays the PTET, it reports each member’s share of the PTET credit on IT-204-IP. This is the document that tells each partner or shareholder how much credit they can claim on their individual return.

Think of IT-204-IP as the bridge between the entity-level payment and the individual-level credit. Without it, there’s no mechanism for the partner to prove they’re entitled to the credit on their personal Form IT-201.

How the PTET Is Calculated — Rates and Income

The PTET isn’t a flat rate. New York uses a graduated rate schedule based on the entity’s total pass-through taxable income:

• Up to $2 million — 6.85%
• $2 million to $5 million — 9.65%
• $5 million to $25 million — 10.30%
• Over $25 million — 10.90%

These rates apply to the aggregate New York-source income of all the entity’s eligible members. “Eligible” means members who are individuals, estates, or trusts — income allocated to corporate partners doesn’t count for PTET purposes.

The taxable income base mirrors what would be taxable to the individual members on their personal returns. So if the entity has $1 million in New York-source income allocated to individual partners, the PTET is calculated on that $1 million at the applicable rate.

One wrinkle that catches people off guard: the PTET rate schedule can produce a higher effective rate than what the individual would have paid on their own return. A partner in the 6.85% bracket individually could end up with the entity paying at 9.65% because the entity’s aggregate income pushes into a higher PTET bracket. The credit still offsets dollar-for-dollar on the personal return, but the entity is fronting more cash than the partners might expect. That difference is real money out the door earlier in the year, even though it washes out at filing time.

The Individual Credit — Form IT-653

After the entity pays the PTET, each partner or shareholder claims their proportional share of the credit on their personal New York return using Form IT-653 (Pass-Through Entity Tax Credit). The credit equals the individual’s pro rata share of the PTET paid by the entity for that tax year.

Form IT-653 flows directly into your IT-201 (resident) or IT-203 (nonresident/part-year) return. The credit is fully refundable — if the PTET credit exceeds your New York tax liability, you get the excess back as a refund. That’s a meaningful detail. It means even if your New York tax bill is relatively small (maybe you have other credits or losses offsetting income), you still get the full benefit of the PTET payment.

How the Credit Flows

The sequence works like this: the entity pays the PTET to New York, reports each member’s share on IT-204-IP, and then the individual picks up that share on IT-653 and applies it against their personal tax. On the federal side, the entity deducts the PTET payment as a state tax expense on its federal return, reducing the pass-through income that flows to each partner’s federal Schedule K-1. The partner gets a smaller K-1, pays less federal tax, and claims the full New York credit. That’s where the SALT cap workaround lives.

IT-225 — The Addition and Subtraction Piece

Form IT-225 is New York’s catch-all for addition and subtraction modifications to federal adjusted gross income. When an entity elects PTET, there are specific modifications that apply on the individual partner’s or shareholder’s return.

Because the PTET payment reduces the entity’s income at the federal level (it’s a deductible expense on the federal return), the partner’s K-1 income is lower. But New York doesn’t want to give you the benefit twice — once through the lower K-1 and again through the IT-653 credit. So New York requires you to add back the PTET deduction amount on Form IT-225 as an addition modification. This restores your New York taxable income to what it would have been without the PTET deduction, and then the IT-653 credit takes care of the New York tax on that income.

Without the IT-225 addback, you’d effectively double-dip: lower federal income flowing through to a lower New York income, plus the PTET credit on top. New York caught that and closed the loop. The IT-225 modification makes the math work correctly.

Estimated Payments — Quarterly Schedule and Penalties

Electing entities must make estimated PTET payments quarterly. The schedule follows the standard estimated tax calendar:

• March 15 — First estimated payment (25% of estimated annual PTET)
• June 15 — Second payment (25%)
• September 15 — Third payment (25%)
• December 15 — Fourth payment (25%)

Notice that the first payment is due on the same date as the election deadline. So if you’re electing for the first time, you’re making the election and writing the first check on the same day. Plan accordingly — this isn’t something to decide on March 14.

Underpayment penalties apply if you don’t pay at least the lesser of 90% of the current year’s PTET liability or 100% of the prior year’s PTET (110% if the entity’s prior-year income exceeded $150,000). These are the same safe harbor rules you’re used to from individual estimated taxes, applied at the entity level.

The payments are made electronically through the entity’s Online Services account with the Department of Taxation and Finance. No paper checks. If the entity overpays, the excess is credited to the partners or shareholders proportionally and flows through to their IT-653 credit.

Common Mistakes and Planning Opportunities

Mistakes We See Regularly

The most frequent mistake is simply missing the March 15 election deadline. We’ve seen business owners assume they can make the election when they file their return in September or October. By then, it’s too late — the election is irrevocable and must be made prospectively. There’s no extension for the election itself, even if the entity files an extension for its return.

Another common error: forgetting the IT-225 addback on the individual return. Tax software doesn’t always handle this automatically, especially when K-1 data is entered manually. If the addback is missed, the return understates New York income and the refund is too large. That’s an audit flag waiting to happen.

We also see entities fail to make adequate estimated payments. The PTET is a new line item for a lot of businesses, and it’s easy to overlook when cash flow planning for the year. Underpayment penalties at the entity level are a cost that nobody benefits from.

Planning Opportunities

For business owners evaluating their entity structure, the PTET election is another data point in the S corporation vs. partnership analysis. Both entity types qualify, but the tax rate and income allocation mechanics differ enough that one structure might produce a better overall result than the other.

Multi-state businesses should coordinate PTET elections across states. New York isn’t the only state offering a pass-through entity tax — Connecticut, New Jersey, California, and many others have their own versions. The interaction between multiple state PTETs and the federal deduction can get complicated. If your entity operates in two or three states, a coordinated tax planning approach prevents credit stacking problems and ensures you’re not leaving money on the table in any jurisdiction.

Timing of income recognition matters too. If you can control the timing of income into the entity (through billing, contract terms, or year-end accruals), you might be able to manage which PTET rate bracket the entity falls into. Moving $500,000 of income from one year to the next could mean the difference between the 6.85% and 9.65% brackets — a real dollar difference of $14,000 in PTET liability on that income alone.

Real-World Example: The Actual Tax Savings

Let’s put numbers to it. Suppose you’re a 50% partner in a New York LLC taxed as a partnership. The entity earns $800,000 of New York-source income, and your share is $400,000. You file jointly with your spouse and your combined federal marginal rate is 35%.

Without PTET

Your $400,000 share flows to your federal return and your New York return. On the federal side, you want to deduct the state tax you’ll pay on this income. New York tax on $400,000 of income (assuming the 6.85% bracket applies to this slice) is roughly $27,400. But thanks to the SALT cap, you can only deduct $10,000 of state and local taxes on your federal return — and that $10,000 probably gets eaten by property taxes alone. So your state income tax gets zero federal deduction. You pay $27,400 to New York and get nothing back from the feds.

With PTET

The entity elects PTET. It pays $54,800 in PTET on the full $800,000 of entity income (at 6.85%). Your 50% share is $27,400. On the federal partnership return, the $54,800 PTET payment is deducted as a business expense, reducing the entity’s taxable income to $745,200. Your K-1 now shows $372,600 instead of $400,000.

That $27,400 reduction in your K-1 income, at your 35% federal marginal rate, saves you $9,590 in federal taxes. On the New York side, you add back the $27,400 on IT-225, bringing your New York income back to $400,000, and then claim the $27,400 IT-653 credit. Your New York tax bill nets to the same amount. The only thing that changed is your federal bill — it dropped by $9,590.

For a two-partner firm with $800,000 of income, that’s $9,590 in real savings per partner, or $19,180 for the entity’s owners combined. Every single year. And the savings scale up — a partner with a $1 million share at the 37% federal bracket saves over $18,000 annually just from this election.

Filing Checklist — Forms at a Glance

• Entity level: Make PTET election online by March 15 — Pay quarterly estimated PTET — Report PTET on entity return (IT-204 for partnerships) — Issue IT-204-IP to each partner/shareholder showing their credit share
• Individual level: Receive IT-204-IP from entity — File Form IT-653 to claim the PTET credit — File Form IT-225 to add back the PTET deduction amount — Apply credit on IT-201 (residents) or IT-203 (nonresidents)
• Federal level: Entity deducts PTET payment on federal return — Partners receive reduced K-1 income — No special federal form required for the credit

Sources & References

• New York Department of Taxation and Finance — Pass-Through Entity Tax (PTET)
• IRS Notice 2020-75 — Tax Treatment of Pass-Through Entity-Level State Taxes
• 26 U.S.C. §164 — Taxes (including SALT deduction limitations)
• Form IT-653 Instructions — Pass-Through Entity Tax Credit
• Form IT-225 Instructions — New York State Modifications
• Form IT-204-IP — Partner’s/Shareholder’s Information Schedule
• Form IT-201 Instructions — Resident Income Tax Return