If you’re a New York State or New York City business owner, whether you’re based in Manhattan, Brooklyn, or anywhere in the five boroughs, there’s a powerful tax savings strategy you should know about. It’s called the NYS PTET, or the New York State Pass-Through Entity Tax. Despite being one of the most valuable tax strategies available, many business owners don’t fully understand or utilize it properly. It allows you to deduct your state and city taxes directly through your business, bypassing the cap on your state and local tax deduction.
New York City business owners face one of the highest combined tax burdens in the country. Between federal income tax, New York State income tax, New York City income tax, and New York City business tax, a successful business owner can easily be paying 50 cents or more on every dollar of income toward taxes. That makes taxes your single biggest expense. The NYS PTET helps restore a deduction that was taken away, and for most NYC business owners, that’s worth thousands of dollars a year.
Here’s what it is, how it works, and whether it makes sense for you.
The Problem the NYS PTET Solves
Back in 2017, federal tax law capped the State and Local Tax (SALT) deduction at $10,000 per year on personal returns. For New Yorkers paying significant state and city tax, that cap stung. You used to be able to deduct all your state and local income tax on your federal return. Now you can only deduct $10,000 of it, no matter how much you actually paid.
New York State responded by introducing the PTET in 2021, available for tax years beginning on or after January 1, 2021. It was designed specifically to help business owners work around the SALT cap.
An important update: The “One Big Beautiful Bill,” signed into law in July 2025, temporarily increased the SALT cap to $40,000 for tax years 2025 through 2029. That sounds like good news, and for some people it is. But the higher cap phases out for taxpayers earning over $500,000, reducing by 30 cents for every dollar over that threshold until it hits the floor of $10,000. Many successful NYC business owners are still getting hit hard. And PTET remains fully available and unaffected by this new law. It continues to bypass the SALT cap entirely, regardless of your income level.
How It Works
To qualify, the business owner must elect into PTET each year. Your accountant cannot do this for you. You need to set up a New York State Business Online Services account at the Department of Taxation and Finance website. The good news is this setup is a one-time process. You will need a prior year tax return on hand to verify your identity when creating the account. We help all of our clients get set up, and once it’s done, making the election each year takes just a few minutes.
The deadline to elect is March 15 of the tax year.
Once elected, here is what happens:
- The business pays New York State and New York City tax on its income at the entity level. Quarterly estimated payments are made throughout the year instead of paying non-deductible state and city tax on your personal return.
- The business deducts that tax as a federal business expense, lowering federal taxable income with no SALT cap limitation.
- The owner receives a credit on their personal New York return for the tax already paid by the entity, so there is no double taxation.
The result is straightforward. The same state and city tax gets paid either way. But routing it through the business instead of your personal return frees up a federal deduction that would otherwise be blocked or limited.
The NYC Advantage: State and City Together
New York City followed the state in 2022, adding its own PTET layer for tax years beginning on or after January 1, 2022. For NYC business owners, this is where the real power of PTET shows up.
When you elect into PTET, you are deducting both your New York State income tax and your New York City income tax through the business in one election. New York State’s PTET rate is 6.85% on the first $2 million of PTE taxable income, which covers the vast majority of NYC business owners and solo practices and small firms. Above that threshold, the rate steps up in brackets, reaching 10.9% for the highest earners. . New York City adds another 3.876% on top of that. Combined, most NYC business owners are paying close to 11% in state and city income tax alone, before federal tax even enters the picture. For small business owners and professional practices across Manhattan and the outer boroughs, that adds up fast.
PTET lets you deduct every dollar of that through your business with no cap. New York State residents benefit significantly from PTET. New York City residents benefit even more because of the additional city income tax layer. No other business owners in the country have more to gain from this strategy.
What the Savings Actually Look Like
Here is a real example with actual numbers.
Say you are an S-corp owner in New York City with $300,000 of business income. Your combined New York State and New York City income tax on that income can be as high as $33,000. Without PTET, you pay that $33,000 personally. Even with the updated $40,000 SALT cap, once you factor in property taxes and other state and local taxes, much of that amount is still unprotected.
With PTET, the business pays that $33,000 instead of you. The full amount is deductible as a business expense on the federal return, completely bypassing the SALT cap. You get to deduct an additional $33,000 in income that was previously generating federal tax with no offset. The higher your income and the higher your combined state and city tax bill, the more meaningful the savings.
Who Should Consider It
PTET is most valuable for:
- S-corp and partnership owners with meaningful net income. If you are still deciding on the right structure, see our guide on choosing the right business entity in New York.
- New York State residents who are limited by the SALT cap, and especially New York City residents who face the additional city income tax layer
- Higher-income business owners, particularly those earning over $500,000 where the new $40,000 SALT cap begins to phase out and PTET becomes even more essential
- Owners who already itemize or are limited in taking their full state and local tax deduction
- Multi-owner businesses, where the benefit scales across each partner or shareholder
Quarterly Estimated Payments Are Required
Electing into PTET does not mean one payment at tax time. New York requires quarterly estimated PTET payments throughout the year, due in March, June, September, and December. If you underpay, there can be interest and penalties. Your accountant should be factoring PTET estimates into your quarterly planning, not just your annual return. This is another reason to have the conversation early in the year. Planning ahead with a retirement strategy can also compound these savings further — see our guide on retirement plans for NYC business owners.
The PTET Deadline
The election must be made by March 15 of the tax year. Miss it and you have lost the benefit for the entire year. There is no going back after the fact. We see this trip up business owners every year who did not know the deadline had passed until it was too late.
The Wrinkle: Sole Proprietors Don’t Qualify
PTET is only available to S-corps and partnerships. Sole proprietors cannot make the election. This is one of the reasons it is worth considering whether operating as a sole proprietor is the right structure for your business. Electing into an S-corp or partnership opens the door to PTET, including the city-level benefit that is otherwise unavailable.
Common Questions
Does electing PTET mean I pay more in taxes? No. PTET does not create a new tax. It changes who pays the existing tax and how it gets deducted. The total state and city tax owed stays the same. The deduction simply moves from your capped personal return to your business return, where there is no cap.
Can my LLC elect PTET? It depends on how your LLC is taxed. A single-member LLC taxed as a sole proprietor cannot elect PTET. If your LLC has elected S-corp status, it qualifies. A multi-member LLC taxed as a partnership also qualifies.
What if my income fluctuates year to year? PTET is still worth considering even if your income varies. The quarterly estimated payment requirement makes accurate projections more important, which is why your accountant should be revisiting this every year.
The Bottom Line
PTET is one of the most meaningful tax-saving strategies available today. It delivers real savings for New York State business owners who can deduct their state taxes through the business, and even greater savings for New York City small business owners, professional practices, and S-corp owners across Manhattan and the five boroughs who can deduct both state and city taxes combined. But it requires planning ahead, accurate income projections, and an election made on time. It is not something to figure out in March or April.
If you are not sure whether your business qualifies, or whether you are capturing both the state and city benefit, bring that question to your accountant well before the March deadline.
Meir Spear is a CPA and CFP based in New York City. He specializes in New York City and New York State taxes, working with small business owners on tax planning, entity structuring, and accounting. Schedule a consultation →