Why Most NY Partnerships Are Leaving PTET Money on the Table

The SALT cap was designed to hurt high-income states. New York gave its partnerships and S-corps a way around it, and a surprising number of firms still do not use it properly.

The New York Pass-Through Entity Tax (PTET) lets an eligible partnership or S-corporation pay state income tax at the entity level, take the payment as a federal deduction against entity income, and then pass a credit through to the partners or shareholders on their personal returns. The entity-level deduction bypasses the personal SALT cap entirely. The 2025 law raised the personal cap to $40,000 (indexed, $40,400 for 2026), but it phases back down toward $10,000 once income passes $505,000 (2026; indexed), which means the partners who have the most state tax to deduct are exactly the ones the cap still binds. In practical terms, a New York partnership with $3 million of taxable income routes $233,500 of state tax through the entity and converts it from a capped personal deduction into an uncapped federal one. At a 35 percent marginal federal bracket, that is roughly $80,000 a year in federal savings that would not otherwise exist.

The math is not exotic. The problem is that most firms either miss the election entirely or make the election and then model the rest of it badly.

The rate everyone gets wrong

The first mistake is the rate. A lot of preparers, and a lot of online PTET calculators, treat PTET as a flat 6.85 percent. That is the starting rate, and for partnerships under $2 million of PTE taxable income, it is correct.

Above $2 million, it is not. New York uses a graduated structure:

• 6.85 percent on PTE taxable income up to $2 million
• $137,000 plus 9.65 percent on the portion from $2 million to $5 million
• $426,500 plus 10.30 percent on the portion from $5 million to $25 million
• $2,486,500 plus 10.90 percent on the portion above $25 million

A partnership with $3 million of taxable income owes $137,000 plus 9.65 percent of the $1 million over the threshold, which is $233,500. Not $205,500, which is what a flat-rate calculation produces. The extra $28,000 of deduction, at a 35 percent marginal federal bracket, is roughly another $10,000 of federal savings.

When we take over a partnership return from another firm, this is one of the first things we check. If the prior preparer used a flat rate on an entity above $2 million, the prior-year numbers are understated. If the entity already made the election but the preparer built the model at 6.85 percent straight through, the partner-level estimates are off and the quarterly payments were likely undersized. That is a cash timing issue that compounds.

NYC PTET is a separate stack

The second mistake is ignoring NYC PTET, or treating it as an alternative rather than an addition.

NYC PTET is a separate election, at a flat 3.876 percent, for partnerships with at least one NYC-resident partner or S-corps whose shareholders are all NYC residents. The base is residence-driven, not source-driven: it is the city taxable income attributable to the resident partners, because the city taxes its residents on everything, not just what is earned inside it. It stacks on top of state PTET. It does not replace it.

For a partnership with two equal partners, one living in Westchester and one living in the Upper East Side, the analysis looks like this: the full entity income flows through state PTET at the graduated rate, and the Upper East Side partner’s full allocable share additionally flows through NYC PTET at 3.876 percent, regardless of where the income was earned. The federal deduction includes both. The personal credits flow through to each partner according to their share.

We have seen firms treat NYC PTET as optional for Manhattan partnerships and leave it off the return entirely. We have also seen firms elect NYC PTET and then fail to coordinate the allocation between the two regimes, which produces K-1s that do not reconcile. Either outcome costs the partners real money.

Credit mechanics at the individual level

The third place things go wrong is on the personal return. PTET paid at the entity level generates a credit on the partner or shareholder’s NY personal return. The credit is refundable, which matters. But the credit flows through on an allocated basis, and the allocation has to match the operating agreement, not just the ownership percentages.

This is where we see real money walked past. A partnership with special allocations, tiered ownership, or partners who came in mid-year often has PTET credit allocations that do not match what the partners actually received economically. The partner-level NY return then either understates the credit (and the partner overpays) or overstates it (and the partner gets a notice later).

A proper PTET workup includes partner-level reconciliation before the entity return goes out the door. Most firms do not do this. K-1s ship in March, personal returns get filed in April, and any mismatch surfaces as a notice in August. By then the remedy is an amended return and a conversation nobody wanted to have.

The election deadline is not the end of the election

The NY PTET election is annual. It has to be made by March 15, which in 2026 shifts to March 16 because March 15 is a Sunday. Miss it, and the entity pays nothing at the entity level for the year and the partners lose the federal benefit for twelve months. We have seen partnerships miss the election because the prior firm “was handling it” and nobody owned the calendar. That is a seven-figure partnership losing $80,000 of federal savings on an administrative miss.

The election is also not a set-and-forget. The estimated payments have to flow through the year on the NY schedule, and the entity return has to reconcile the payments against the final liability. Underpayment at the entity level generates interest. Overpayment is refunded, but the partners may have already paid their own estimates assuming the entity payment would cover them.

What a proper PTET engagement looks like

We treat PTET as a three-layer analysis every year.

The first layer is eligibility and election timing. If the entity has partners who joined during the year, or partners who left, or a change in NYC residency status, the election decision is not automatic.

The second layer is the payment schedule. PTET estimates are due quarterly. The quarterly amounts should track the expected full-year liability, not last year’s amount carried forward. This is where the graduated rate matters most: an entity growing from $1.8 million to $2.5 million of taxable income crosses the $2 million threshold, and the quarterly payments should reflect that.

The third layer is the partner-level reconciliation. The allocation schedule, the credit flow-through, and the interaction with the partner’s other NY income all need to be modeled before the K-1s ship. This is the step most firms skip, and it is where the partner-level errors live.

None of this is advisory work dressed up as compliance. This is compliance done at the level the election actually requires. The firms leaving money on the table are the firms treating PTET as a checkbox rather than a calculation.

The election was designed to restore a benefit the federal government took away. Treating it as administrative plumbing gives the benefit back to the federal government. The clients who move to a firm that actually runs the numbers notice.

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This article is for informational purposes only and does not constitute tax advice. The topics discussed depend on specific facts and current law, both of which change. A proper analysis of your situation requires professional review. Contact us to discuss whether this applies to your business.