NYS PTET UPDATE: What We Know & What It Means to Your Business

NYS PTET UPDATE: What We Know & What It Means to Your Business

Important Deadline Approaching

The 2022 PTET election period is open. To opt in, submit the Annual Election Application before or on March 15. Click here for instructions.

While RBT CPAs is always ready to do whatever it takes to support clients, by law we can’t make your PTET election. However, we can file your return and pay any tax owed if you complete and submit a TR-2000.

For more information or assistance, contact your local RBT CPAs, LLP office.

The New York State Department of Taxation and Finance issued a Pass-Through Entity Tax (PTET) technical bulletin last August and provided updates via its website. While questions remain, deadlines loom for paying any balance owed for 2021 PTET (if applicable), for opting in for 2022, and for providing a first quarter 2022 payment. Now is a good time to review what we know so you can plan accordingly.

What is a pass-through entity (PTE)?

When a company’s income taxes are paid solely by its owners (rather than the business), it’s considered to be a PTE. The business doesn’t pay corporate taxes; instead, its owners pay taxes on their share of business income based on their personal tax rates. As a result, business owners avoid having to pay taxes twice – once at the corporate level and a second time on the income they receive as owners.

Are all businesses considered pass-through entities (PTEs)?

No. PTEs are distinguished by which tax form they file. To be considered a PTE, an entity must file a 1065 partnership or a 1120-S S corporation return. A sole proprietorship or LLC owned by a single member and reported via Form 1040, Schedule C, or Schedule E does not qualify as a PTE.

What is a pass-through entity tax (PTET)?

In 2017, the Tax Cuts and Jobs Act (TCJA) limited the deduction business owners could take for state and local taxes on income and property to $10,000. This impacted high tax states the hardest. States realized the same limit didn’t apply to businesses at a corporate level, and the pass-through equity tax (PTET) was born. In 2018, Connecticut became the first and only state to adopt a mandatory PTET; other states followed with a voluntary PTET.

When did New York (NY) adopt a PTET?

The IRS issued additional guidance for the PTET via Notice 2020-75 in November 2020, clarifying that state taxes paid by a partnership or S Corporation would reduce ordinary business income and not be subject to the $10,000 State and Local Tax (SALT) cap. More states seemed to take this to be a green light from the IRS to move ahead. Today, nearly half of all states have their own PTET, including New York, which adopted its PTET in 2021. NY state businesses could opt in by October 15, 2021, for tax returns filed in 2022, and annually thereafter.

What is the NY State PTET election?

The PTET is not automatic; businesses must opt in to take the PTET each year. Once a business does opt in, the election is irrevocable for that year. For 2021, the opt in election period was in October. Starting this year and each year going forward, the opt in election must be made by no later than March 15. If a business does not want the PTET, no action is required.

What is the benefit of opting in to take the NY state PTET?

Businesses that opt in will receive a based on the PTET paid, while their owners may be eligible for a PTET credit on their NY state income tax returns.

Is there any potential downside to opting in?

Businesses taking the PTET in 2021 and 2022 will want to pay special attention to cash flow, as any balance owed for 2021 plus the first quarter estimated payment for 2022 will both be due March . (Business owners were required to pay personal estimated taxes for 2021 and those that did and who are now paying PTET may overpay and owe less than normal to NY.) We are constantly monitoring potential federal tax law changes – including raising the $10,000 SALT cap – that might impact the value this program provides. For 2022 onwards, businesses must make an election on or before March 15, so business owners will have to speculate about profits for the upcoming year, with only a few months of actual data in hand.

Who can make the PTET election?

Only an authorized person from an eligible entity – not a tax preparer – can make the election to opt in. For a partnership, an authorized person includes “any member, partner, owner or other individual with authority to bind the entity or sign returns under Tax Law 653.” For a New York S Corporation, an authorized person includes “any officer, manager or shareholder of the New York S corporation who is authorized under the law of the state where the corporation is incorporated or under the S corporation’s organizational documents to make the election.”

How do I make a PTET election for 2022?

You must login to your New York State tax account to make the election. For step-by-step instructions, we created this guide.

How does my business pay its PTET?

For 2021, businesses will need to go onto their online NYS tax filing account and initiate payment directly to the state. A tax preparer or software cannot do this unless a business owner completes a TR-2000, which provides authorization to log into the account, file a return, and pay any tax owed. RBT CPAs encourages its clients to complete and submit this form and then we’ll handle the rest when it comes to your PTET filing.

If you have any questions or need additional information or assistance, please remember RBT CPAs is here to help. Let us know what you need so you can be 100% confident you’re making the right decisions and taking the right actions for your firm in relation to the NYS PTET.