NYS Pass-Through Entity Tax

NYS Pass-Through Entity Tax

Last updated on January 10th, 2024

New York State individual owners of partnerships and S corporations have an opportunity to benefit from valuable tax deductions.

The NYS Pass-Through Entity Tax (PTET) 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 be revoked up until March 15 of the year it is made; then, it is irrevocable.

Elections cannot be made by tax professionals, only by authorized individuals (partner, shareholder, etc.) of the business. The election must be made by March 15th.

The calculations differ slightly based on entity type and residency status. S Corporations with all NY resident shareholders will pay the PTET on 100% of the entity’s NY taxable income while S Corporations with any nonresident shareholders will pay the PTET based only 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%.

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 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.

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.


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