New York Gov. Andrew Cuomo signed into law, as part of the budget, a new tax election for pass-through entities that could theoretically be used as a workaround for the $10,000 cap on state and local tax (SALT) deductions.

The measure, which can be seen on page 13 of this document, hinges on IRS guidance released last year, which said that state and local taxes imposed on and paid by a partnership or S corporation based on its income are allowed as a deduction by that partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment. Therefore, these taxes are not subject to the SALT deduction limitation for partners and shareholders who itemize deductions.

Given this blessing from the IRS, several states worked quickly to enact entity-level taxes on partnerships and S corporations to provide taxpayers a workaround to the $10,000 deduction limit. The NYSSCPA advocated heavily for New York to join them, and it now has as of Monday night.

Simplified, the new measure allows partnerships and S corporations to make an annual election to pay state and local tax at the entity level in exchange for a personal income tax credit equal to the partner's, member's or shareholder's direct share of the pass-through entity tax. According to Philip London, a member of the Society's Legislative Task Force, this means that if someone owes $100 in taxes, and an S corporation the individual is a part of pays $100 based on this new entity-level tax, that person would be allowed a credit as if the individual had made an estimated payment on his or her personal income taxes equal to that $100. This has the effect of essentially removing the $10,000 limit, so long as the income is processed through a pass-through entity first.