House Bill H.R. 1 Advances to Senate

Update on the SALT Cap and PTET Deduction as of May 22, 2025

House bill H.R. 1, which was approved by the House and advanced to the Senate earlier today, May 22, 2025, includes the following Amendments to the “SALT cap” (i.e., section 112018, Limitation on Individual Deductions for Certain State and Local Taxes, etc.), among other provisions, contained in the original bill which was advanced by the Ways & Means Committee on May 14, 2025:

• Increased the limit on the federal deduction for state and local taxes to $40,000 per household ($20,000 for married taxpayers filing separately) starting in 2025.

• Adopted a threshold of $500,000 per household ($250,000 for married taxpayers filing separately) on modified adjusted gross income (MAGI) above which the federal deduction is phased out starting in 2025.

• For tax years between 2026 and 2033, the $40,000 and $500,000 SALT cap and threshold amounts are increased by 1% per year. For tax years after 2033, these amounts remain fixed at the 2033 level.

It should be noted that the effective date for these provisions was accelerated from 2026 originally to 2025 in the approved House budget.

There was a technical correction made to the original bill allowing a deduction for state pass-through entity taxes (PTETs) for section 199A qualified trades or businesses (i.e., non-SSTBs). Specifically, on page 971, line 12, the phrase “or (4)(A)(ii)” was inserted after “paragraph (3)(A)” of section 112018(b)(5) which defines “substitute payments.” As a result of this technical correction, the definition of this term in the approved House bill excludes an “excepted tax” as defined in paragraph (4)(A)(ii) of this section as “any tax as described in section 164(a)(3) which is paid or accrued by a qualifying entity with respect to carrying on a qualified trade or business (as defined in section 199A(d) without regard to section 199(A)(b)(3).” We believe that this technical correction reflects the legislative intent of the House to allow the PTET deduction for pass-through entities that are section 199A qualified trades or businesses (i.e., non-SSTBs) as per the Joint Committee on Taxation’s description (see page 311) of this provision.

Two days earlier, on May 20, 2025, the AICPA had submitted AICPA Comment Letter - One Big Beautiful Bill Act | Advocacy | AICPA & CIMA to the Ways & Means Committee in which it commented on various tax proposals in the bill. In this letter, the AICPA urged Congress to retain the PTET deduction for all pass-through entities, not just those that are section 199A qualified trades or businesses (i.e., non-SSTBs). It is yet to be seen whether the Senate would make any changes to the bill equalizing the SALT cap workarounds for all pass-through entities, including those that are SSTBs in addition to those that are non-SSTBs. We will continue to track the bill’s progress and update you on further developments.

Superseded Post from May 21, 2025 (read below)

According to CBS News,[1] the latest reported House GOP proposal is to allow a $40,000 SALT cap for families with up to $500,000 in income, after which the benefit would be phased out, effective for 2026.

After 2017, over 35 states and one locality have enacted elective pass-through entity taxes (PTETs) that serve as workarounds to the current SALT cap of $10,000 which expires at the end of 2025.[2] These PTETs allow the owners of electing pass-through entities to deduct state and local taxes as business expenses on the entity’s federal return without being subject to the current SALT cap in accordance with IRS Notice # 2020-75.[3]

The Ways and Means bill that was advanced on May 16, 2025, as currently written, appears to bar the SALT cap workarounds for all pass-through entities, regardless of whether they operate a trade or business that qualifies for the section 199A deduction. [4] For further details, please read Ways and Means Bill Curtails SALT Cap Workarounds for All Passthrough Entities – The Tax Law Center. [5]

There may be gaps in the plain text bill that allow SALT cap workarounds, which are not immediately obvious. Moreover, the bill is subject to change as it passes the House and moves to the Senate. There is likely to be a negotiation process to reconcile the two versions of the bill, before it can be sent to the president for his signature. So, it is too early to conclude whether the SALT cap workarounds will survive after 2025. We will keep you updated on this as the bill progresses.

Footnotes:

[1] Jennifer McLogan, Congress appears poised to raise SALT cap as part of Trump tax bill. Here’s the latest. (May 21, 2025, at 6:20 PM EDT), https://www.cbsnews.com/newyork/news/salt-cap-tentative-deal-president-trump-budget-proposal/

[2] Brian Myers and Eileen Reichenberg Sherr, Recent Developments in states’ PTETs, The Tax Adviser (September 1, 2024)

[3] Id.

[4] Miles Johnson and Michael Kaercher of NYU Law’s “The Tax Law Center” at https://taxlawcenter.org/blog/ways-and-means-bill-curtails-salt-cap-workarounds-for-all-passthrough-entitie (last visited May 21, 2025 at 6 pm ET)

[5] Id.

Grains of SALT for NAV Lenders

Cheers with “NAV-gronis”

If you were one of the Milken Institute Conference attendees who had a “NAV-gronis” cocktail at the rooftop party earlier this week, next time please try it with SALT on the rim! Here, SALT stands for state and local tax.

Today’s New York Times DealBook “Fear of Tariffs, and Hopes for a Reprieve, at CEO Conference” with Andrew Ross Sorkin [i] explains what a “NAV-gronis” is – a cocktail with a name which may be a reference to the NAV loans some P.E. firms use to boost liquidity. [ii]

NAV loans are backed by the net asset value of the select P.E. firm's investments, a diversified pool of assets. As such, a NAV loan may not only help diversify and reduce the lender’s risk but may also reduce the lender’s state effective tax rate. There are a number of state and local tax opportunities that NAV lenders may consider for optimizing their return on investment.

State sourcing of loan interest

For state and local tax purposes, interest on a secured loan is generally sourced to the location of the borrower or the location of the collateral, depending on whether the loan is secured by equity (i.e., the borrower’s stock / membership interest) or the underlying assets.

The primary borrowers on NAV loans are P.E. funds, which tend to be located in high-tax jurisdictions (e.g. NYC, Chicago). NAV loans are secured by interest in the P.E. funds’ portfolio companies, which are typically spread across the US or may be located outside of the US in low- or no-tax jurisdictions. Therefore, structuring a NAV loan where the P.E. fund’s portfolio companies are listed as co-borrowers (not just guarantors) on the loan may result in a lower state effective tax rate for NAV lenders and greater returns for their investors.

Interest on loans that are secured by equity

Interest on loans that are secured by equity is generally sourced to the location (i.e., commercial domicile or principal place of business) of the borrower. As such, the state sourcing may be different depending on whether the sole borrower on the NAV loan is the P.E. fund, or the underlying portfolio companies are listed as co-borrowers. In the former case, where the P.E. fund is the sole borrower, the interest on the NAV loan may be 100% sourced to the P.E. fund’s location. In the latter case, where the portfolio companies are listed as co-borrowers, the interest on the loan may be sourced to the portfolio companies’ location, potentially resulting in a lower state effective tax rate upon the interest income.

Interest on loans that are secured by assets

Interest on loans that are secured by assets is generally sourced based on the type of assets – intangible property, real property, or tangible personal property. Generally, if the assets comprise intangible property, the interest is soured to the location of the borrower similar to how interest on loans that are secured by equity is sourced. If the assets comprise real property, the interest is generally sourced to the location of the property. For loans that are secured by tangible personal property (i.e., chattels that are not permanently affixed to land), the sourcing is more nuanced and may depend on the tax jurisdiction. Some states source interest on loans that are secured by tangible personal property similar to interest on loans secured by real property. Other states source such interest similar to interest on loans secured by intangible property. A state-by-state analysis must be performed to determine the correct sourcing of interest income.

Whether the security on the loan is the portfolio company’s equity or its assets may affect how the interest on the loan is sourced. Let’s take a portfolio company (a Delaware LLC which is disregarded for federal tax purposes) that is domiciled in NYC and holds data centers in TN, TX, and WA as an example. If the loan is secured by the portfolio company’s LLC interest, the interest on the loan is generally sourced to NYC where the portfolio company is domiciled for most states. In contrast, if the loan is secured by the portfolio company’s assets – data centers located in TN, TX, and WA – the interest on the loan is generally sourced to the location of the assets for most states. Exceptions to these general rules exist in certain jurisdictions.

In instances where the portfolio company is located in a high-tax jurisdiction and the assets it holds are located in low-tax jurisdictions, consideration should be given whether the assets as opposed to the equity of the portfolio company should be used as collateral on the loan. That is because the collateral type affects the state sourcing of the interest income. Using one type of collateral may be more beneficial than another type of collateral for state and local tax purposes, assuming of course that this makes sense for business and legal purposes.

Place where the loan origination activities are performed

The above describes the general state and local tax market sourcing rules, under which loan interest is sourced to the location of the borrower / collateral. There are certain jurisdictions that use place of performance (or cost of performance) in lieu of market sourcing rules applicable for loan interest. For example, if the NAV lender is a pass-through entity that is located in New York City and New York State, for purposes of the NYC Unincorporated Business Tax and the NYS partnership withholding tax, the NAV lender sources interest on a loan (whether secured by equity or by assets) to the location where it performs the loan origination activities, rather than to the location of the borrower / collateral. The loan origination activities that are considered include solicitation, investigation, negotiation, administration, and approval. However, if the NAV lender is a corporation rather than a partnership, it sources interest under market sourcing rules (to the location of the borrower / collateral) for NYC and NYS corporate tax purposes. Unlike partnerships that generally use place of performance sourcing, corporations generally use market sourcing for the NYS and NYC corporate tax. Therefore, the lender’s legal entity type, and in some instances the borrower’s legal entity type, may affect the state and local tax sourcing of loan interest income.

Financial institution or not?

Another level of complication to the sourcing analysis is added by the industry classification (a financial institution or not?) of the NAV lender. Some jurisdictions define the term “financial institution” broadly and any entity that generates interest income exceeding 50% of the entity’s total gross income qualifies as a financial institution in those jurisdictions. Other jurisdictions define the term narrowly – e.g., only an entity that is a federal- or a state-chartered bank or owned by a bank may qualify, or the jurisdiction may require that the entity be in a direct competition with the business of national banks to qualify as a financial institution. In addition to affecting the sourcing of interest income, the financial institution classification may impact the apportionment formula and whether loans are included in the lender’s property factor for apportionment purposes. For example, California uses a single sales factor formula with market sourcing of receipts for financial institution and a three-factor formula (including receipts, property, and payroll) with market sourcing of receipts for non-financial businesses. Additionally, financial institutions include loans in the property factor and the loan principal balances are sourced to the location where the origination activities are performed rather than the location of the borrower / collateral.

The takeaway

Upon the structuring of loans, NAV lenders and their advisors should perform a detailed state-by-state analysis before the closing of the transaction. To the extent it is commercially feasible, any state and local tax optimization opportunities identified during the analysis should be incorporated in the loan structuring and legal agreements.

Footnotes:

[i] “Fear of Tariffs, and Hopes for a Reprieve, at CEO Conference” New York Times DealBook, May 8, 2025.   

[ii] “All the Rage in Private Equity: Mortgaging the Fund,” New York Times Business DealBook, May 11, 2024.    

Overview of the FY 26 NYC Executive Budget

The Executive Budget

On May 1, 2025, Mayor Eric Adams released New York City’s balanced $115.1 billion FY 26 Executive Budget, with projected gaps of $4.6 billion in FY 27; $5.8 billion in FY 28, and $5.7 billion in FY 29. Following that, City Charter Section 1515 gives the mayor discretion to change the FY 26 estimates for all revenues (including federal and state grants) up to May 25, 2025, in a communication to the City Council. Subsequently, the FY 26 revenue estimate can be amended with a message of fiscal necessity to the Council delineating the reasons for the change. Through May and June, the Council and the Mayor negotiate adjustments to the Executive Budget, resulting in an agreement known as the Adopted Budget. This agreement must be reached before July 1, the beginning of the next fiscal year.

It should be noted that the Executive Budget, which Mayor Adams released earlier this month, is predicated on economic conditions as well as federal fiscal and trade policy known prior to April 2025. [1] The unprecedented federal trade policy announced in April 2025 and the subsequent impact on financial markets poses a potential impact to the city’s economy as well as its tax base. Therefore, the outlook may be updated in the upcoming Adopted Budget.

Revenue Sources

New York City’s budget is funded through a mix of local taxes, non-tax revenue, and state and federal grants. Non-tax revenue comes from sources like permits, licenses, and fees. State and federal categorical grants provide additional funding for specific programs and services. The budget’s local tax revenue sources include the following:

(i)     Property tax;

(ii)    Personal Income Tax;

(iii)   Business income taxes, which include taxes on both corporations and unincorporated businesses;

(iv)   Sales tax; and

(v)   Real estate transaction taxes, which include both the Real Property Transfer Tax and the Mortgage Recording Tax.

Personal and business income tax revenues are sensitive to both economic and financial market downturns. Lost jobs and lower bonuses or incentive pay result in lower taxable incomes. Meanwhile, lowered capital gains from asset sales and diminished business income for sole proprietors, partnerships, and other pass-through entities, further erode income tax collections. Declines in the financial sector’s profitability have a disproportionate impact on the city’s business income tax collections, due to the significant share of the financial sector in the city’s economy.

Sales tax and real estate transaction taxes fall because of declining incomes from wages, capital gains, and business income. Additionally, investment in commercial real estate is dependent on overall business conditions, including policy uncertainty, and asset prices.

Chart 1 below shows the break-out of business income tax collection by entity type, including flow-through entities and corporations.

Chart 1: Business income tax liability by entity type ($ billion)

Business Income Taxes

In recent years, the growth of city taxes on business income has outpaced the growth of other local tax revenue sources. Since FY 19, business income taxes (inclusive of tax audits) have increased by more than 50%, whereas all other tax revenues combined grew by 17%. In FY 24, business income taxes represented 14.1% of all city tax revenues, 3 percentage points higher than in FY 19 and the highest share since FY 13.

New York City has a complex system of business income taxes, which are administered by the city’s Department of Finance (DOF) and include the following:

(i)   Business Corporation Tax (BCT) which applies to C-corporations;

(ii)  Banking Corporation Tax (BTX) which applies to banks that are also S-corporations;

(iii) General Corporation Tax (GCT) which applies to S-corporations;

(iv) Unincorporated Business Tax (UBT) which applies to sole proprietors (IRS Schedule C businesses) and unincorporated entities (partnerships and LLCs); and

(v)   Pass-Through Entity Tax (PTET) which is an optional tax on pass-through entities (specifically, S-corporations and partnerships) created in 2022 to circumvent the $10,000 cap on the state and local tax deduction from federal taxable income for individuals.

Chart 2 below shows the combined BCT, BTX, and GCT revenues for FY 2000 through FY 2024.

Chart 2: BCT, BTX, and GCT Revenues ($ billion)

Chart 3 below shows the UBT revenues for FY 2000 through FY 2024.

Chart 3: UBT Revenues ($ billion)

Impact of US Policy Changes

According to US Treasury Secretary Scott Bessent, tariffs, tax cuts, and deregulation are the “core components” of President’s Trumps economic agenda. [3] These three components, which are creating short-term turbulence, are supposed to work together to drive long-term investment and growth to the US economy. The Treasury chief said that the US markets are “anti-fragile” and well equipped to weather any short-term turbulence, citing the rebound from the Great Depression, two World Wars, the September 11 attacks, the 2008 – 2009 global financial crisis, and the COVID-19 pandemic.

As noted in the New York City Comptroller’s report entitled “Taking Trump’s Tariffs Seriously: The Fiscal and Economic Impact for NYC,” [4] tariffs are expected to have an indirect impact on the city’s business income taxes through their impact on GDP, consumption, and overall profit margins. The city’s economy is unlikely to benefit from onshoring of manufacturing activities or to be hurt directly by retaliatory tariffs, because exports are not sourced to New York City. Tariff-induced price increases may temporarily help sales tax collections, but declining consumer spending as a result of reduced employment and wage growth, combined with lower demand for goods due to higher prices, could have a stronger impact and reduce sales tax collections.

Federal tax policy will be a major focus of attention in 2025, mainly due to the extension of expiring individual tax provisions. At this time, proposals concerning the corporation tax appear to have a limited impact on the city’s business income taxes.

Deregulation could impact the financial and technology sectors through lower capital requirements and a wave of mergers and acquisitions and initial public offerings. Reports from recently released 2024 Q4 earnings of large banks signal high expectations for 2025, including for dividends and buybacks. If these expectations were to be realized, there would also be positive repercussions on personal income taxes.

It is worth noting that this is not a full evaluation of President Trump Administration’s economic policies. The slashing of federal government capacity and funding impacts the state and city budgets, the private sector, health and education institutions, and the providers of health and social services in ways that are not directly captured in this analysis. Immigration policies can drive population losses in New York City and could remove tens of thousands of workers from the labor market. The federal budget is also a source of uncertainty as the House and the Senate have just started the committee work that will lead to a final agreement.

Similar to families and businesses, the city is facing great uncertainty as it approaches the final stages of its budget process for FY 26. The Comptroller’s Office estimates suggest that the impacts of a recession on tax revenues, while possibly less severe than in the past, could be significant. As tax revenues for the rest of FY 25 appear to be on track to exceed budget expectations, the city should not waste the opportunity to deposit resources in its “rainy-day” fund to shore up finances in FY 26 and beyond. In addition, as previously proposed in the Comptroller’s report on the city’s Preliminary Budget, $1,0 billion should be added to the city’s general reserve fund in FY 26, to help protect New Yorkers from the broader fiscal uncertainties stemming from President Trump Administration’s funding cuts and immigration policies.

Sources:

[1] “Mayor Adams Releases “Best Budget Ever,” City of New York, Office of the Mayor / News, May 1, 2025.

[2] The Budget Process, New York City Council at https://council.nyc.gov/budget/process

[3] “Trump's tariffs, tax cuts, deregulation will drive US growth, investment, Bessent says” by David Lawder; Reuters, May 5, 2025.

[4] “Taking Trump’s Tariffs Seriously: The Fiscal and Economic Impact for NYC,” Office of the New York City Comptroller Brad Lander, April 16, 2025.