The New York state budget deal announced yesterday includes a workaround of the temporary federal limit on state and local tax deductions (the SALT cap). The provision was part of Gov. Cuomo’s initial budget proposal in January, and it comes at a time when many Democrats are calling on Pres. Biden to include the elimination of the SALT cap as part of his recently announced infrastructure proposal.

The SALT cap was added to the Internal Revenue Code as part of the Tax Cuts and Jobs Act (TCJA) in 2017. It is scheduled to lapse after 2025. Until then, however, joint filers may not claim more than $10,000 in itemized deductions for state and local tax payments for purposes of determining their federal income tax liability. This can be burdensome for New York residents, especially after the budget’s tax rate increases are enacted.

Last November, the IRS issued guidance in which it described an approved form of workaround based upon an entity-level state tax.

The New York budget provision is modeled on the above-referenced IRS notice, and would allow pass-through businesses to pay taxes at the entity level. The entity-level tax would be offset by a corresponding individual income tax credit.
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