BILL NUMBER: S7643REVISED 2/12/2026
SPONSOR: GOUNARDES
 
TITLE OF BILL:
An act to amend the tax law, in relation to the limitation on the pass-
through entity tax credit and the city pass-through entity tax credit
 
PURPOSE OR GENERAL IDEA OF BILL:
This bill would reduce the available credits claimed by all partners,
members or shareholders of an partnership or S corporation electing to
pay the pass through entity tax from 100% to 87%
 
SUMMARY OF PROVISIONS:
Section one amends § 863 of the Tax law to reduce the available state
pass through entity tax credit from 100% to 87%
Section two amends § 870 of the Tax law to reduce the available city
pass through entity tax credit from 100% to 87%
Section three provides for an effective date
 
JUSTIFICATION:
The vast majority of businesses in NYS are organized as pass-through
entities (PTEs), which means that the business's income "passes through"
to its owners or members, who then report it as taxable dividends on
their personal income tax (PIT) returns. Most businesses favor the PTE
model because it helps them avoid double taxation, in which corporate
franchise tax is paid at the entity level on top of PIT paid by the
business's owners on the dividends distributed to them by the entity.
In the FY22 budget, NYS created a new pass-through entity tax (PTET)
where, in a total reversal of the traditional flow-through taxation
model, the firm withholds and remits income tax on the dividends owed to
its shareholders at the entity level instead of passing the dividends on
to the shareholders for them to then report on their PIT returns. The
PTE is then issued a credit which it must allocate amongst all its
owners to offset the taxes that they've already effectively paid at the
entity level. The business can then also deduct the income tax that it
pays to the state from its federal taxes, greatly lowering its federal
tax liability while cleverly circumventing the $10,000 cap on federal
tax deductions for state and local taxes created in the 2017 Tax Cuts
and Jobs Act (TCJA) that the PTE's owners would otherwise be subject to.
For example, a business may have two resident shareholders and a total
business income of $1,000,000. The business elects the PTET, which has a
rate of 6.85% for this level of taxable income, so the business remits a
PTET of $68,500 to the state. The state then issues the business a
corresponding credit back of $68,500, which will be split between the
two shareholders as a $34,250 credit that each claims on their personal
income tax returns. The business has not gained any kind of advantage
from electing the PTET at the state level, since they received a credit
back for exactly the amount they paid, and the PTET is thus revenue
neutral to the state. The PTE is able, however, to deduct the $68,500
they have paid in PTET from their federal tax return, lowering their
federally taxable income to $931,500 ($1,000,000 - $68,500). This allows
the PTE to circumvent the $10,000 federal cap on state and local tax
deductions that would otherwise apply.
While the PTET was initially created in the wake of the 2017 Tax Cuts
and Jobs Act (TCJA) as a means for taxpayers working for a PTE to
circumvent the $10,000 cap on state and local tax (SALT) deductions from
their federal tax bills, the SALT cap just tripled under H.R.1 to
$40,000. This convoluted tax workaround is no longer justified, as New
York should not be going out of its way to help taxpayers with multi-
million dollar properties that have a local property tax bill exceeding
$40,000 avoid federal tax liability.
This legislation would thus reduce the PTET credit against the personal
income tax by 13 percent, to an 87 percent rebate. This would put New
York in line with Massachusetts, which rebates 90 percent of its version
of the PTET, and Connecticut, which rebates 87.5 percent of its version
of the PTET. Gently phasing out the PTET credit rebate from a full 100
percent to 87 percent is a commonsense way to raise revenue for the
state while aligning with shifts in the federal SALT landscape, as any
taxpayer continuing to elect the PTET must both work for a PTE and have
a property tax bill exceeding $40,000. This means that reducing the PTET
rebate will in reality impact only our state's highest earners, who will
either choose to forego the PTET election entirely as they already
financially equipped to weather the storm of a $40,000 deduction cap on
their federal tax bills, or who will continue to elect the PTET because,
even with a 13 percent reduction in the rebate, the PTET credit is still
large enough that it provides a net benefit to an electing S corps
shareholders.
 
PRIOR LEGISLATIVE HISTORY:
None
 
FISCAL IMPLICATIONS:
TBD
 
EFFECTIVE DATE:
This act shall take effect immediately

Statutes affected:
S7643: 863 tax law, 863(b) tax law, 870 tax law, 870(b) tax law