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New York proposes surcharge on high income taxpayers, pass thru entity tax option

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January 2021


Governor Andrew Cuomo (D) on January 19 announced a revenue bill (legislation) as part of the state’s FY 22 budget that proposes to increase the personal income tax rate on taxpayers with income in excess of $5 million; pause the phased reduction of middle-class tax rates; introduce an optional pass-through entity tax; require all federal S corporations that are subject to tax in New York to be treated as S corporations for state tax purposes; amend the state’s real estate transfer tax, subject all vacation rentals to sales and use taxes; modify several credits, including extending the film tax credit for one year; make other tax changes.

The takeaway

This proposal, created in response to the deficit amplified by the COVID-19 crisis, represents the Governor’s first initiative in what might prove to be an eventful legislative session. As the Governor noted, the temporary high-income tax surcharge, when combined with New York State and City personal income taxes, would result in the nation’s highest state and local personal income tax rates for affected taxpayers. 

In addition, S corporations need to consider the implications of the provision binding them at the state level to their federal S corporation election - effectively disallowing such entities to be C corporations for state purposes. Note: New York City (City) does not recognize the federal S election and continues to tax federal S corporations as C corporations under the City’s general corporation tax.

The optional pass-through tax comes on the heels of the IRS November 9 Notice 2020-75, which clarifies that state and local income taxes imposed on, and paid by, a partnership or an S corporation on its income are allowed as a deduction in computing the entity’s nonseparately stated taxable income or loss for the tax year of payment. Under the regulations announced in the notice, partnerships and S corporations could deduct state and local income taxes against ordinary income, with no addback required at the individual partner or shareholder level. (See our insight on Notice 2020-75, here)

The fate of this legislation may hinge on the actions of the federal government, as made clear in the budget briefing book. In addition, there are likely to be several amendments to the legislation, as well as independent tax proposals put forth by the Legislature. Some provisions that are not included in this proposal but that have received attention in the media include proposals related to stock transfer taxes, net worth taxes on billionaires, and carried interest. It remains to be seen whether any of these legislative proposals will move forward either as part of the budget bill or as part of separate bills.  Amendments are routinely put forth during the New York legislative process, but the heightened focus on federal action as related to the state budget is unique in New York budget negotiations, meaning that taxpayers need to be equally focused on developments both in Washington DC, and in Albany.

Contact us

Peter Michalowski

Partner, State and Local Tax Consulting Leader, PwC US

Brian Rebhun

Asset Management Tax Leader, PwC US

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