Proposed Changes to New York PTET Credit Could Increase Tax Burden for NYC Business Owners

Written by Jeffrey S. Gold, CPA LMC Tax Director

New York City Mayor Zohran Mamdani and City Council Speaker Julie Menin have proposed significant changes to the Pass-Through Entity Tax (PTET) regime that could materially impact high-income taxpayers and owners of partnerships and S corporations operating in New York. The proposal would reduce the New York City PTET credit from 100% to 75%, effectively increasing New York tax liability for many taxpayers who currently benefit from the structure. This alert summarizes how the PTET works, what is being proposed, and the potential implications for taxpayers.

Background: How the PTET Works

New York enacted the PTET in 2021 as a response to the federal $10,000 limitation on state and local tax (SALT) deductions. Under this law, partnerships and S corporations may elect to pay New York tax at the entity level. That tax is fully deductible for federal income tax purposes, and individual owners receive a dollar-for-dollar refundable credit against their New York personal income tax. As a result, the owner’s federal taxable income is reduced while their New York tax liability remains unchanged. Since its enactment, many New Yorkers have used PTET as a federally beneficial but state-neutral planning mechanism.

Summary of the Proposal

Under the proposal advanced by Mayor Mamdani and Speaker Menin, the federal deduction for the full PTET payment would remain unchanged, but the amount of credit taxpayers may claim against New York City taxes would be reduced from 100% to 75%. New York State residents who do not live in New York City would see a smaller reduction, to 90%. While the federal deduction remains intact, the proposal would convert PTET from a tax-neutral strategy into a partial tax increase on pass-through income.

Policy Rationale

City leadership has framed the proposal as part of a broader effort to address New York City’s multibillion-dollar budget gap. It is expected to generate approximately $700 million to $1 billion annually. Proponents argue that PTET functions as a tax benefit primarily for high-income earners, and that modifying the credit would ensure those taxpayers contribute additional state and local revenue while still retaining a meaningful federal benefit.

Political Landscape

Support for the measure includes Mayor Mamdani, Speaker Menin, and a number of progressive policymakers and advocacy groups. Both the New York State Senate and Assembly have included PTET credit reductions in their respective budget proposals.

Opposition has come from Governor Kathy Hochul, who is up for reelection this year and has reportedly resisted measures that would increase taxes on residents. Business groups and professional associations, including medical and dental organizations, have also expressed concern, arguing that the change would raise effective tax rates, undermine the purpose of the PTET regime, and harm New York’s competitiveness.

Currently, the New York State budget process is significantly delayed beyond its April 1 deadline. PTET changes remain under consideration as part of broader negotiations, but there is a clear divide between the Legislature, which is open to the proposal, and Governor Hochul, whose veto authority creates a significant obstacle. As a result, the issue remains unresolved as part of the ongoing budget negotiations.

For these reasons, the exact proposal (a 75% credit) faces meaningful headwinds. A modified or scaled-down version, such as a partial reduction or temporary measure, is possible, though full repeal or no change remain realistic possibilities.

Considerations for Taxpayers

If enacted, this change would primarily affect New York City residents, partners and S corporation shareholders with significant pass-through income, and professional service firms, investment partnerships, and real estate structures.

Key implications include higher effective New York State and City tax rates, a reduced benefit from PTET elections, the need for entities to reassess tax elections and estimated payments, and the time and expense of PTET compliance. Taxpayers would need to evaluate whether the federal tax benefit of the PTET election continues to outweigh the reduced New York State and City credit, as the balance between federal savings and state cost would no longer be neutral.

We are actively monitoring developments in Albany and will provide updates as the budget is finalized. In the interim, taxpayers should continue to evaluate PTET elections under current law, recognize that future benefits may be reduced, and consider modeling potential exposure under various scenarios. If you would like to discuss how these proposals may affect your specific situation, please contact your LMC tax advisor.