New York State individual owners of partnerships and S corporations have an opportunity to benefit from valuable tax deductions.
NYS has finally issued long awaited guidance with regards to the newly created Pass-Through Entity Tax (PTET). The PTET was enacted as part of the 2021-2022 fiscal year budget in April 2021, and it is effective for tax years beginning on or after January 1, 2021. Given the high real property taxes and high personal income tax rates in New York State, many individual taxpayers have felt the effects of the state and local tax deduction limitation that was part of the Tax Cuts and Jobs Act (TCJA) of 2017. NY’s PTET was put into place to hopefully provide some NY business owners with a new opportunity for federal tax savings around this current limitation.
The PTET works by shifting the burden of state income tax payments related to income passed through from partnerships and/or S corporations.
Rather than the individual shareholders/partners being responsible for paying the tax, the pass-through entities (PTEs) will pay the tax. Partnerships and S corporations that pay the PTET are allowed a tax deduction against their ordinary business income without regard to the $10,000 SALT limitation. And if you haven’t been itemizing your deductions on your personal tax return because the standard deduction has been greater than your otherwise deductible expenses, the PTET provides for additional deductions that weren’t available to you previously.
Each year, NY partnerships and/or S corporations must make an annual election to participate in this program. The election is made online with the New York Department of Taxation and Finance through a business’ online services account. Once made, the entity is responsible for filing and paying all required tax returns and payments for that year; the election may not be revoked. Elections cannot be made by tax professionals, only by authorized individuals (partner, shareholder, etc.) of the business. The election for the 2021 tax year must be made by October 15, 2021. In subsequent years, the election must be made by March 15th.
The calculations differ slightly based on entity type and residency status for partners in a partnership. S corporations will pay the PTET based on the entity’s NY sourced taxable income. Partnerships will pay the PTET based on all allocable taxable income for residents and only NY sourced taxable income for non-residents. The tax rate ranges from 6.85%, for PTE taxable income up to $2 million, up to the highest NYS marginal tax rate of 10.90%.
Estimated tax payments are not required if you elect into the program for the 2021 tax year, but quarterly estimates will be required in future years and will be due on the 15th days of March, June, September, and December. Cash basis taxpayers may consider making a payment before year-end to benefit from the tax deduction in 2021. If a personal taxpayer is subject to making personal estimated tax payments, they should continue to make those payments in 2021 to avoid assessment of penalties and interest.
The annual PTET return is due on March 15th, but taxpayers may request a six-month extension of time to file.
The annual return will report the PTE taxable income, total tax liability, and the direct share of PTET that is available to each owner as a tax credit. This PTET credit, equal to 100% of the tax paid, will be claimed by the owner on their personal New York tax return. Certain trust owners may also be eligible for to claim the PTET credit. Corporation and partnership owners are not eligible for PTET credits and therefore, PTET won’t be paid on their shares of the income.
Resident owners of a PTE may claim a resident tax credit on Form IT-112-R for the payment of another state’s PTET by their partnership or S corporation. For tax years prior to 2021, the resident tax credit was only allowed if the tax was assessed and paid by the resident individual.
The PTET has brought challenges and complexities with it. The silver lining is an opportunity for significant federal tax savings for NY business owners. Please contact our team of dedicated professionals if you’d like to discuss if and how this program can benefit you and your business.