How New Mexico’s Pass-Through Entity Tax Works

The New Mexico pass-through entity tax lets a partnership, S corporation, or multi-member LLC pay state income tax at the business level, at a flat 5.9 percent of New Mexico-source net income, instead of passing the full state tax burden to individual owners. The point is federal: the entity-level payment is deductible on the business’s federal return and sidesteps the $10,000 cap on state and local tax deductions that applies to individuals. Owners then claim a refundable credit on their personal New Mexico return for their share of what the entity paid.

Why Owners Elect It

Before the election existed, owners of pass-through businesses reported their share of business income on their personal federal returns and claimed a deduction for state taxes paid. The federal SALT cap limits that personal deduction to $10,000 no matter how much state tax the owner actually owes. For a New Mexico business owner with significant state-source income, the cap can leave tens of thousands of dollars in state taxes non-deductible at the federal level.

New Mexico created the entity-level option through 2022 legislation, adding Section 7-3A-10 to the state tax code. When a qualifying entity elects to pay state income tax directly, that payment is treated as a business expense. Business-level tax payments are not subject to the individual SALT cap, so the full amount reduces the entity’s federal taxable income. IRS Notice 2020-75, issued in November 2020, confirmed that treatment for partnerships and S corporations, and it is the mechanism that makes the election valuable.

Which Entities Qualify

The statute defines a pass-through entity as any partnership or corporation that passes income, losses, deductions, and credits through to its owners for federal tax purposes.¹ In practice that covers:

General and limited partnerships filing federal Form 1065.
S corporations filing federal Form 1120-S.
Multi-member LLCs treated as partnerships or S corporations for federal purposes.

Single-member LLCs that the IRS disregards as separate entities do not qualify. The election is available only to entities with more than one owner that file a separate federal return as a partnership or S corporation.

The election is voluntary and made annually, so an entity that elects for one year is not locked in for the next.¹ When the election is made, though, it applies to every partner or member. You cannot cover some owners and leave others out, which means the decision should involve everyone whose personal return will be affected.

How the Tax Is Calculated

The tax applies to the entity’s net income sourced to New Mexico. Start with the ordinary business income reported on the federal return, then apply New Mexico’s apportionment rules to isolate the portion attributable to in-state activity. That figure is the base.

The rate is a flat 5.9 percent, matching the highest marginal rate under both the personal and corporate income tax schedules in the state.² An S corporation with $500,000 in New Mexico-sourced net income would owe $29,500. Each owner’s share of that tax is proportional to their ownership interest.

Filing and Paying

The New Mexico Taxation and Revenue Department updated its pass-through entity forms in recent years to incorporate the legislative changes to Section 7-3A-10, and the current forms are posted on the department’s pass-through entity page.³ Before you start, have the following in hand:

The entity’s federal EIN, matching what’s on file with the state.
A completed federal return (Form 1065 or Form 1120-S), since the state figures derive from it.
Apportionment data: revenue, payroll, and property figures used to calculate New Mexico-source income.
Each owner’s name, tax identification number, and ownership percentage, so the state can allocate the credit properly.

Returns are filed through the department’s Taxpayer Access Point portal. After logging in to the business account, you select the pass-through entity return, enter or upload the data, and submit. The portal issues a confirmation number as proof of filing. Paper filing is still accepted, but electronic filing is faster and produces fewer errors.

Payment is due at the same time as the return, by electronic funds transfer or ACH credit through the portal. The return follows the entity’s federal due date, which for calendar-year filers is March 15 for both S corporations and partnerships. An extension of time to file does not extend the time to pay.

Missing deadlines triggers two separate consequences. A late-filing penalty runs 2 percent of the tax liability per month or fraction of a month, capped at 20 percent, and a late-payment penalty runs 0.5 percent per month, capped at 10 percent.⁴ Interest also accrues daily at the federal rate plus 3 percent, compounded monthly, with the rate resetting each quarter.⁵

How Owners Claim the Credit

Because the entity has already paid state tax on each owner’s share of income, every owner receives a credit against their personal New Mexico income tax liability for their proportional share of that payment.¹ The credit is refundable. If it exceeds what the owner owes on their personal return, the state pays the difference back.

The entity is responsible for giving each owner a statement showing their share of the tax paid. Owners attach that information to their personal Form PIT-1. The state reconciles the entity-level payment against each owner’s return, so mismatches between the two sides create delays.

Non-Resident Owners

The election simplifies life for owners who live outside New Mexico, because the entity has already covered their New Mexico tax obligation. The credit they claim on a non-resident return offsets that liability dollar for dollar. The Taxation and Revenue Department has not issued blanket guidance exempting non-resident owners from filing a personal New Mexico return when the entity makes the election, so non-residents should still plan to file a non-resident return to claim the credit, even if the net tax owed ends up at zero.

Potential 2026 Changes

Keep an eye on federal legislation if you are planning for the 2026 tax year. A proposal circulating in Congress would raise the individual SALT deduction cap to $30,000 for most filers while abrogating Notice 2020-75 and denying the entity-level deduction. Under that proposal, pass-through entity tax payments would flow through to individual owners as separately stated items and fall under the new SALT cap, which would eliminate the primary advantage of making the election. The proposal has not become law as of this writing, and the current framework remains in effect. A mid-year change could shift the math significantly for any entity that has already elected.

When the Election Is Worth It

The election is not automatically beneficial for every qualifying entity. Value depends on how much New Mexico-source income the business generates and whether owners have already used up their $10,000 SALT deduction through other state and local taxes, such as property taxes. For a two-member LLC earning $200,000 of New Mexico income, the entity-level tax would be $11,800. If both owners have already exhausted their SALT caps, that $11,800 becomes a full federal deduction they would not otherwise receive, worth real money at their marginal federal rate.

An owner with minimal other state and local taxes who would not hit the $10,000 cap anyway gains little, and the added complexity of coordinating entity-level and personal returns may not be worth it. The election also requires unanimous buy-in, since it covers everyone in the entity, which can be a sticking point when some owners benefit more than others.

1
Justia. New Mexico Code 7-3A-10 – Election of Entity-Level Tax; Credit
2
New Mexico Taxation and Revenue Department. Pass-Through Entity
3
New Mexico Taxation and Revenue Department. Filing Changes for Pass-Through Entities
4
Justia. New Mexico Code 7-1-69 – Civil Penalty for Failure to Pay Tax or File a Return
5
New Mexico Taxation and Revenue Department. Penalty Interest Rates