New York State enacted a work-around for the $10,000 SALT deduction limitation in its budget bill signed into law in the spring of 2021 (see our prior Alert here). New York has issued long-awaited guidance and clarifications on the Pass-Through Entity Tax (“PTET”) via a Taxpayer Services Bulletin issued on August 25, 2021 (TSB-M-21(1)C, (1)I). The guidance contains many technical issues and explanations, most importantly confirming that the state will provide a mechanism for pass-through entities to make a 2021 PTET payment on, or before, December 31, 2021 so that its owners can claim a 2021 federal tax deduction for the PTET.
We discuss some of the major provisions below.
Only New York State S corporations and entities taxed as partnerships may elect the PTET.
Election due date
The election must be made annually. For tax years beginning on, or after, January 1, 2021, the election must be made no later than October 15, 2021. For tax years beginning on and after January 1, 2022, the election must be filed no later than March 15 for the year in which the entity is electing (to elect for 2022, the entity must make the election by March 15, 2022).
The election for the PTET must be made online. Once made, the election is irrevocable for the year for which it is made. The election must be made by an authorized officer, partner or member of the entity. Third parties, including CPA firms and law firms, cannot file the election on behalf of the entity. The State has set up a link where businesses can make the election:
All PTET returns are filed on a calendar-year basis
All PTET returns are filed on a calendar-year basis. An electing entity that is a fiscal-year taxpayer must elect, file, and pay PTET for the calendar year in which its fiscal year ends. A fiscal year taxpayer does not recompute its income on a calendar-year basis. Instead, its PTE taxable income must be computed for the fiscal year that ends within the PTET calendar year. The PTET return for an electing entity with a fiscal year is due on, or before, March 15 following the close of the calendar year in which its fiscal year ends.
Example: A partnership’s fiscal year is March 1, 2021 through February 28, 2022. Although the partnership reports its income for Article 22 purposes on a 2021 IT-204, Partnership Return, the partnership will make its PTET election for the 2022 PTET by March 15, 2022 and file its PTET return by March 15, 2023.
Estimated tax payments for PTET
For PTET tax year 2021
An electing entity is not required to make any estimated tax payments for PTET. However, it may choose to make optional online estimated tax payments prior to December 31, 2021. An online estimated tax application for PTET will be available by December 15, 2021.
Regardless of whether an electing entity chooses to make optional estimated tax payments for tax year 2021, personal income tax estimated payments must be made by, or on behalf of, partners, members, or shareholders under Article 22, calculated as if they were not entitled to the PTET credit.
Personal income tax estimated payments are not considered prepayment of PTET and may not be applied to PTET liabilities.
For PTET tax years beginning on, or after, January 1, 2022
An electing entity is required to pay quarterly estimated tax on the amount of PTET calculated for the current taxable year using the online application. Estimated payments are due on, or before, March 15, June 15, September 15, and December 15 in the calendar year prior to the year in which the due date of the PTET return falls.
Each quarterly payment should be an amount equal to at least 25% of the required annual payment for the taxable year (90% of the current year’s tax or 100% of the prior year’s tax).
How to calculate pass-through entity taxable income (PTE taxable income)
PTET is imposed on the PTE taxable income of an electing entity. Generally, PTE taxable income includes all income, gain, loss, or deduction of an electing entity that flows through to a direct partner, member, or shareholder for New York personal income tax purposes.
A direct member, partner, or shareholder is any member, partner, or shareholder that is issued a federal Schedule K-1 by the electing entity based on the member’s, partner’s or shareholder’s direct ownership interest in the electing entity.
A federal Schedule K-1 issued to an entity that is disregarded for tax purposes, such as a single member limited liability company, is treated as if issued directly to the individuals or entities that include the disregarded entity’s activity on their income tax returns.
The calculation of PTE taxable income differs between electing New York S corporations and electing partnerships. S corporations compute the PTE based upon their New York-source income, whereas partnerships compute the PTE on the entire distributive share of income of resident partners plus the New York-source income of nonresident partners.
Electing New York S corporations
An electing New York S corporation calculates its PTE taxable income by aggregating amounts of income, gain, loss or deduction that flow through for New York income tax purposes to direct members or shareholders who are taxable under Article 22. Aggregated income and gain is reduced by any losses or deductions without regard to any limitations that would be imposed on the member’s or shareholder’s federal and New York State personal income tax returns. The electing S corporation must then apportion this net amount of taxable income to New York based on the apportionment rules of Article 9-A included in Tax Law § 210-A.
Before computing its PTE taxable income, an electing partnership is required to classify all direct members or partners that are taxable under Article 22 as a resident or nonresident of New York. Members or partners may not be classified as part-year residents for PTET purposes. A member or partner should be treated as a resident if they are a resident of New York for New York personal income tax purposes for at least half of the year. All other members or partners should be treated as nonresidents.
If a member or partner is a trust, the electing partnership must classify the trust as a resident or nonresident of New York State based on the residency status of the trust and not of the beneficiaries. A trust, other than a trust that is disregarded for tax purposes, that is a direct partner, member, or shareholder in an electing entity is allowed a PTET credit on the trust’s income tax return, but it is not permitted to distribute any PTET credit it receives to its beneficiaries.
The tax base includes all items of income, gain, deduction and loss that are allocated to a resident individual partner, including trusts and estates, along with income, deductions, gains and losses allocated to non-resident individual partners and trusts to the extent that they are derived from New York sources, as calculated using the three-factor formula partnership business allocation.
An electing partnership’s calculation of its PTE taxable income must include all items of income, gain, loss or deduction, to the extent they would flow through and be included in the taxable income of direct members or partners that are taxable under Article 22, including guaranteed payments. A partnership must not include in its PTE taxable income any amounts of income, gain, loss, or deduction that flow through to a direct partner that is a partnership or an entity not subject to tax under Article 22, even if the income is ultimately taxable to a partner under Article 22 through tiered partnerships.
How to calculate the PTET
Addition modification to income
The PTET cannot be claimed as a deduction for New York State tax purposes. An eligible taxpayer claiming the PTET credit must make an addition modification to federal adjusted gross income or federal taxable income on the eligible taxpayer’s New York State personal income tax return for an amount equal to the amount of the PTET credit claimed.
Additionally, resident partners, members, or shareholders must make an addition modification to federal adjusted gross income or federal taxable income on their New York State personal income tax returns equal to the amount of pass-through entity tax paid to another state, local government, or the District of Columbia on their behalf and that is the basis for computing the resident tax credit discussed below.
Resident tax credit
For tax years beginning on or after January 1, 2021, resident partners, members, or shareholders will be allowed a resident tax credit against their New York State personal income tax for any pass-through entity tax imposed by another state, local government, or the District of Columbia, that is substantially similar to the PTET imposed under Article 24-A8 paid by a partnership or New York S corporation to another jurisdiction. This includes any taxes paid by an LLC treated as a partnership or S corporation for New York tax purposes.
In the case of taxes paid by an S corporation, the S corporation must be treated as a New York S corporation. An ineligible S corporation will be deemed to have met this requirement to the extent it is treated as a New York S corporation for purposes of computing the New York adjusted gross income of the resident shareholder.
A list of substantially similar taxes that qualify for the resident tax credit will be posted by the state at a future date.
For tax years beginning prior to January 1, 2021, a shareholder of a subchapter S corporation or a partner in a partnership is not allowed a resident tax credit for any tax imposed upon, or payable by, the S corporation or partnership to another state, local government, or the District of Columbia, even if the tax is substantially similar to New York’s PTET. However, a shareholder or partner is allowed a resident tax credit if the taxes are calculated on the income of the S corporation or partnership but are imposed upon, and payable by, the shareholder or partner.
New York’s guidance is welcome in resolving many of the issues that concerned taxpayers and adds clarity to many of its PTET provisions. Taxpayers should consider their specific tax structures to determine if they could benefit from participating in the New York PTET workaround.
Please contact your Mazars professional for additional information.
Published on September 1, 2021