Webinar Transcript
[00:00:02.770] - Speaker 1
Hello everyone. I'm Shaun Garcia, Marketing Manager here at Mazars in the US. And I'd like to thank you for attending our Webinar. Today we will be presenting New York Pass through Entity Tax, a potential opportunity to save federal taxes which will be led by Harold Hecht, Toni Mazzacca and Harry Johnson. Before we begin, I'd like to review a few housekeeping items. First, we encourage you to ask questions. To do so, please send them to us using the Q and A box on the lower left hand side of your screen. We will try to answer all of your questions during the Webinar, but if a fuller answer is needed or if we run out of time, your question will be answered after the Webinar via email. Second, to earn the available one CPE credit during today's Webinar, you must listen to at least 50 minutes of the presentation and answer at least three polling questions. The polling questions are a series of questions meant to confirm that you are actively attending this Webinar. Please note that you must be logged in individually to receive credit for today's Webinar. If you are attending as a group, only the individual who is logged in will receive credit. If you've completed the requirements, your certificate will be available for download at the end of the Webinar. Instructions on how to download your certificate will be displayed on the screen at the end of the presentation, so please stay on the line. Lastly, you can download a copy of today's presentation from the Green Resources button at the bottom of your screen. Here you will also find our Webinar Frequently Asked Questions, a document which offers some basic troubleshooting information and other useful tips. Again, this can be found under the Green Resources button at the bottom of your screen. Now, thank you once again for joining and I'll hand it over to Harold.
[00:01:59.790] - Speaker 2
Thank you Sean, and welcome everyone. We are truly excited to bring you all the details of what could really be a very significant federal tax savings opportunity as a result of New York's enactment of the Pass Through Entity Tax. This is really hot off the press in that many of us tax professionals were waiting for New York State to issue guidance with respect to the details of the PTET and those were just issued in the last two weeks. So in today's presentation, we are going to bring you an in depth analysis of the PTET, how did it make the election, how to compute the tax, and so forth. By way of introduction, I'm Harold Hecht. I'm a Managing Director and I lead the state and local tax practice for Mazars in the US. Joining me today are Toni Mazzacca, who is a federal tax partner in our New York office, specializing in financial services, and Harry Johnson, Senior Manager in our state local tax group in our Pennsylvania office. Here is the agenda for today's presentation. Tony is going to kick this off for us by giving all of us some background on federal law and applicable provisions. I will provide you with a comprehensive list of all the states that, as of now, have enacted similar pass through provisions that might be of interest. Then Harry is going to give you some of the nitty gritty with respect to what entities qualify to make the election, when the election is due, how you make the election, and when payments can be remitted. I will then share with you some of the deeper concepts of how the computation varies for partnerships and S corporations. And finally, we'll summarize what factors need to be considered in whether to elect or not. Toni will also, in her presentation, give you a very high level summary of the New York provisions. And then Harry and I will bring you all of the significant details. So, without further ado, I will pass it on to Toni to give you the background on the federal tax provisions. Toni.
[00:04:48.090] - Speaker 2
Thank you Harold. Good afternoon and happy September 15 to everyone. As Harold mentioned, I'm going to provide you with a brief summary of the federal impact of the New York pass through entity level tax. So when the Tax Cuts and Jobs Act was issued in 2017. As many of us know, it contains a provision that limits individuals itemized deductions for state and local taxes paid to $10,000 a year. This is known as the Salt Limitation. This limitation applies to tax shares after December 30, 2017, and before January 1, 2026. This limitation has impacted individual taxpayers federal tax liability, especially in states with high tax rates such as New York. In response to that, on November 9 of 2020, the IRS issued Notice 2020-75, which states that proposed rights will be issued on the deductibility of State and local tax payments made through past or entities. These payments are referred to as Specified income tax payments. So if a partnership or an S Corp. Makes a specified income tax payment during the year, the partnership or S Corp is allowed a deduction for the specified income tax payment in computing its overall taxable income for the taxable year in which the payment is made and these payments are not taken into account in applying the fault deduction limitation to any individual who is a partner in the partnership or a shareholder of the S Corporation. Therefore, what happens is when the partnership or S Corp makes the income tax payment to the local jurisdiction and the expense would then be allocated to each partner or shareholder similar to any other item of income or deduction on each partner or shareholder's individual K One as a prorated share of non separately stated income or loss, and it would then be deducted on each individual form 1040 typically, partnership income flows onto Schedule E of the form 1040, which generally does not limit expenses versus if the individual taxpayer pays the State and local taxes themselves. This is reported on Schedule A, which is now, as we know, limited to $10,000 a year. The New York Budget Act includes a new law that provides a workaround to the federal law, and this puts the limit on an individual which puts the limit on the individual's federal income tax return. In addition to New York, there are a handful of states that have also adopted pastor entity tax regimes and are intended to bypass the $10,000 salt limitation. And again, this is done by imposing the tax directly at the past or entity level and correspondingly providing the owners of these past or entities with a credit or deduction that would fully or partially mitigate the additional expense at the federal level. I think Harold and I were talking before the call, and we're just trying to determine how many states out there right now are contemplating this entity level tax. And we think it's about half a dozen at the moment, if I'm not mistaken. Right, Harold?
[00:08:05.970] - Speaker 2
Yes, Yes. And Toni, I think we also were speaking about the intriguing issues surrounding the proposals that Congress is contemplating right now with respect to various federal tax provisions. And one of the items for sure that seems to be and highly debated is the salt limit. And the latest I saw was that there's a possibility that the Democrats might be offering something along the lines of a two year deferral of the salt limitation that might be part and parcel of the three and a half trillion budget package that is being contemplated. But clearly at this point seems like there's no consensus between the progressives and the more moderate Democrats as to proceed.
[00:09:12.370] - Speaker 3
Yes, that's right. So we'll have to wait and see on that one. So the concept of the workaround is like I mentioned, this is an entity level specific tax that is made by the pass through entity, such as a partnership or an escort. The payment of the tax must be made by the entity and then it's passed through as a deduction to its members. Because the deduction is an entity level tax, it doesn't fall under the limiting law that we just mentioned. And to make members hold for the cash paid by the entity, the states provide a credit to the members on their personal state income tax returns. And this credit is what flows up to each individual partner or shareholders. K One there's no cash out of pocket between the entity and its members, and there is a tax deduction for the members that avoid a $10,000 limitation. And the criteria that must be met in order to make the selection is that it must be made by an eligible partnership or escort. And Harry is going to go into further details later on in the presentation. The election must be made annually online by an authorized person and on or before the due dates of the first mandatory estimated PTET payment. The first mandatory estimated PTET payment is March 15 for a calendar year taxpayer. However, for 2021 only, this deadline has been extended to October 15 of 2021. And similar to how corporations make their estimated payments, these PTET payments must be made online in quarterly payments due 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. Also for 2021, the requirement to make these PTET estimated payments has been waived. So the IRS is really availing itself to allow taxpayers to take advantage of this new provision. The pasture entity tax return is a separate return outside the forms 1065 or 1120s that the partnerships or S-Corps file and again, it's filed online, as I mentioned. So for calendar year taxpayers, it would be due March 15, same deadlines as the forms 1065 and 1120s. And there are also six month extensions available. Similar to all other income tax returns, pass through entity tax is imposed on passthrough entity taxable income which flows through to the direct members of the pass through entity who are subject to New York personal income tax. And this would include guaranteed payments. Just to illustrate this, if you have a married couple that files jointly and one is a partner in a partnership and the other is a W2 employee, and the partnership chooses to make the selection and pay the state tax on behalf of its partners, at the entity level, these taxes would not be limited on the individuals 1040. This therefore frees up the limitation to the other spouse who continues to be limited to the $10,000 salt limitation. This helps maximize the deductions and the couple be allowed to take. And again, it's extremely impactful in states with high income tax rates. And just to reiterate what Harold just said, our Democratic leaders just have not reached a consensus on the finance yet in terms of what they're going to do with the $10,000 cap on these deductions. So we just have to see what happens. And so now I'm going to hand it back to Harold who go into more details on the state issues related to New York pastor entity tax.
[00:13:01.890] - Speaker 2
Thanks, Toni, but before we do that to Sean for a polling question.
[00:13:11.310] - Speaker 1
Yeah, thank you, Harold. The first polling question of the webinar is up on your screen and it's asking what type of company do you work for? Accounting, law firms, financial services entity, real estate owner, manufacturing, redistribution, or other? Please make our selection now. Be sure to click the submit button to get credit for your answer.
[00:14:09.330] - Speaker 1
We're just going to give it a few more seconds. Be sure to click the submit button to get credit. Okay, let's take a look at the results. It looks like the majority 59.5% are from accounting firms. Back to you, Harold.
[00:14:49.630] - Speaker 2
Thank you, Sean. So as Tony mentioned earlier, there are quite a number of states that have jumped on the work around the N wagon and most recently, both California and Illinois enacted legislation that was signed by the governors that enacted exactly the same type of PTET taxes as New York. California clearly very significant and that is such a high tax jurisdiction. The one thing to note about these workarounds is that they are not uniform and they have various effective dates and taxpayers should consider the specific structure that they have, the income source for those jurisdictions and the actual mechanics with respect to computing these pass through entity taxes before deciding whether to elect or not elect. Virtually all of them are elective. Connecticut is one prime example of a pass through entity tax where it's mandatory, where all pass through entities are required in Connecticut to file the pass through entity tax. Sean, I believe we have another polling question. The next polling question is what do you think will be the most likely disposition of the $10,000 salt deduction limitation and the potential tax bill coming out of Congress? Do you believe that the deduction will remain the same at $10,000? Will the deduction be increased or will the limitation be eliminated? Please answer one of the three in order to receive your CPE credit.
[00:17:31.110] - Speaker 1
Thanks, Harold.
[00:17:33.090] - Speaker 2
You're welcome Sean.
[00:17:36.670] - Speaker 1
I'm just going to give it a few more seconds. Be sure to click Submit for credit. Okay, let's take a look at the results. 47.9% said they think the section will remain the same at $10,000.
[00:18:22.310] - Speaker 2
This is really intellectually very intriguing issue because the sticking point is that progressives believe that the lifting of the 10,000 limitations will disproportionately benefit the wealthier taxpayers. And of course, the moderates are concerned that the 10,000 limitation is causing a world full of hurt to some of the states like New York, California and New Jersey that have higher tax rates. So it's almost an intriguing philosophical divide between the two sides that will be really interesting to see how it plays out in Congress. I guess ultimately, when you step back for a moment, these pass through entity taxes to some degree, probably in and of themselves, may be disproportionately beneficial to wealthier people. And ultimately, when it comes to the typical wage earner that won't be able to avail themselves of these days to work around, they seem to be the ones that could potentially be hurt. But again, hopefully details will be forthcoming shortly from Congress. And at this point, Harry is going to take you through some of the deeper details on which entities qualify, how you make the election, and when to make it. So Harry on to you.
[00:20:11.710] - Speaker 4
Thanks Harold. Yeah, I'm just going to provide some more detail on which entities qualify, when the election is due and how the pastor entity tax election is made. As Tony previously indicated, eligible entities are New York s corporations and entities taxes partnerships. An eligible S corporation is defined as any New York S corporation, including an LLC treated as an S corporation for New York and federal income tax purposes as defined by section 208.1 A, and that is subject to the fixed dollar minimum tax under section 209. I just want to make the point that a federal S corporation defaults to C corporation treatment in New York unless the corporation makes its own separate New York s election. Therefore, in order to be an eligible New York S corporation, the entity would have to make, or have had to have made a separate New York S election. An eligible partnership is any partnership, including a limited liability company, treated as a partnership for New York and federal income tax purposes. That is a filing requirement under section 658 C One, and it is not a publicly traded partnership. Additionally, a partnership is eligible to make the election even if it has partners that are not eligible, such as corporate partners. Non eligible entities include trust in the States as well as single member LLC not treated as an S Corp. Full proprietorship, nonprofits and corporations that are not S corporations. Since single member LLCs are not eligible, these entities may want to consider making an S election. Harold or Tony, what are your thoughts on whether a single member LLC may want to make the selection in order to take advantage of the New York past branded tax?
[00:22:23.790] - Speaker 2
Yeah, Harry. Potentially, from a restructured perspective, might make sense. Toni, your thoughts?
[00:22:30.910] - Speaker 3
I mean, I think that if the tax is paid at the entity level, again, it's not going to be limited in any way or generally wouldn't be limited. If it's coming through the partnership, you're always at risk for that limitation being limited on the Schedule A, as things currently stand.
[00:22:53.050] - Speaker 4
Right. Interesting. So it's definitely a consideration. Okay. When does the election have to be made? The election must be made online, and it's made on an annual basis. Once the election is made for that specific year, it is irrevocable. And I think, as Tony previously indicated, the election for 2021 tax year is due on October 15. So that's coming up pretty quickly. It's exactly one month from today.
[00:23:31.610] - Speaker 3
Yeah. One thing I want to say though, Harry, because in reading through all of this and just reading that it's an irrevocable election but it needs to be made annually, did not initially make too much sense to me. But then when we spoke through it, if you think about the way partnerships are, they have partners coming in. A lot of them have partners coming in and out at any given time. So it makes sense that it does need to be done annually, even though it is irrevocable, because you want that election to apply to any partners, any new partners that come in in any given year.
[00:24:16.650] - Speaker 4
Right, exactly.Okay.
[00:24:20.930] - Speaker 4
I think the more difficult issue is going to be for years 2022 going forward, where the election needs to be made by March 15 of that year. Right now making the election for 2021 by October 15, you've got the benefit of knowing what your income is at least for the first nine months or nine and a half months of the year, whereas going forward you're going to make the election by March 15 of that year. Obviously you're going to need to have a little bit of a crystal ball to anticipate what your income will be for the year and whether it makes sense to move forward with the election or not.
[00:25:12.450] - Speaker 3
Exactly right?
[00:25:14.740] - Speaker 4
Yeah, that's a good point Harold. How filers a calendar year basis has to be used to elect file and pay the pass to entity tax. But for fiscal year filers the entity elects files and pays the passer entity tax for the counter year which is fiscal year end, which is obviously a little different than how the actual partnership return will be filed. If you're in a fiscal year, you would actually use the prior year's form. So as an example, if a partnership has a fiscal year ending February 20 822, that partnership would need to make the election no later than March of 2022 for the 2022 PTE taxable year because that's the year the partnerships fiscal year ends. In the 2022 calendar year.
[00:26:21.650] - Speaker 2
There is no requirement to precompute the tax to effectively transition it into a calendar year tax. The tax is based on the fiscal year results for the year ending in that particular year. So you don't convert that to a calendar year amount as an example.
[00:26:49.250] - Speaker 4
Right, that's a good point too. So how do you make the election? The election I think is Toni mention must be made online. New York has set up a webpage that provides a lot of good details on the New York Times Pass Through Entity tax and it really walks you through making the election. The election is actually made via the entity's New York State Business Online Services account. So that is actually the same account that the entity would use to file sales tax returns or make estimated payments of tax. Obviously, if you don't have an online services account set up, it's pretty easy to create one. The web page really walks you through everything. I can make the election and I think it's important to note that New York has specifically indicated that tax professionals a firms may not make the elected on behalf of. So for a New York S Corporation, any officer, manager or shareholder of the New York S Corporation was authorized under the law of the state where the corporation is incorporated or under the S Corporation's organizational documents to make the election and who represents having the authorization under penalty of perjury. That's the official definition that put out. And then for partnerships it's any member, partner, owner or other individual with authority to buy the entity or sign the returns. So probably I would think how to jump in. But the easiest way to probably think about it is whomever they would make that election.
[00:28:58.550] - Speaker 2
So perhaps like the Tax matters partner as an example or someone who signed to return, that sort of individual would be the person most likely to be the one making the election, right? Exactly. And again, let's double underlying that your accounting firm, your legal advisors or any other outside person cannot make this election on behalf of the taxpayer, must be made by the taxpayer.
[00:29:34.710] - Speaker 4
Right? Exactly. Okay, so I think that takes us to our polling question.
[00:29:44.470] - Speaker 1
Thanks, Harry. So the third polling question of the webinar is up on your screen and it reads have you made pass through entity tax elections in other states? Yes. No, not yet, but I plan to do so. Please make the selection now and be sure to click the Submit button to get credit for your answer. Just going to give it a few more seconds. Make sure you click Submit. Okay, let's take a look at the results. 57.1% of the audience says no.
[00:31:15.330] - Speaker 4
I guess that's how it would take. Not super surprising, I guess. We have a large group of accountants, I think, on this webinar. I don't know. What are your thoughts Harold.
[00:31:40.270] - Speaker 4
Well, yes that and I think also each of these pass through entity taxes might have had some losses and minuses to them. As an example, in New Jersey date, under New Jersey law, a partnership is required to make nonresident withholding payments and for some partnerships that would clearly result in doubling up of payments on behalf of a nonresident partner, as an example. So there were some good and some jury reasons why some of these pass through entity taxes perhaps were not elected and some of the largest states had not weighed in on this until more recently. So with New York, Illinois and California being new to the game, I would imagine that we see a market increase, the number of states, and for that matter, number of taxpayers electing these pastoral entity taxes.
[00:32:52.430] - Speaker 4
The next section we're going to get into the nitty gritty as to how payments, when payments can be remitted and the actual tax computation for a partnership in an S corporation. So, just to reiterate what was discussed earlier, there's no requirement for any pass through entity to make any estimated taxes for the PTET one. However, a past due entity can elect to make a payment on or before December 31 of this year. And the state has indicated that they will provide some online link for taxpayers to make the payment somewhere in the December 15 time frame so that the payment could be made between the 15th and 21st. Clearly this is really an important factor because on the federal cash and a cool basis, taxpayers, the payment needs to be made in the calendar year that the deduction is going to be claimed. The other provision that is sort of interesting is that New York State and its legislation requires that members of pass through entities had to make in the election must still make their own personal estimated tax payments as if the election was not made. So if you're a partner or shareholder and entity that makes the election, you still have to make your own personal quarterly estimated tax payments, except that PTET election was not in place and the state has indicated that any members of a failure entity that failed to make the quarterly payments will be subject to underestimated tax penalties failure to make their own quarterly estimated payments for PTET years beginning on or after one month of 2022. As Tony indicated earlier, the quarterly estimated payments will be required. So there is a big difference between the way partnerships and S corporations compute the Pte. The first step for partnerships is that they will be required to classify all direct members or partners as either a resident or non resident of New York to determine the resident status of each member of the partnerships. A member can't be classified as a partner resident for PTET purposes. So basically, a partner who resides in New York for at least half the year will be deemed to be a resident of New York for purposes of the PTET calculation. All other members are non residents. It should be noted that if the member or partner is a trust, basically the residency status is based on the residency of the trust, not on the resident status of the beneficiaries. So if it's a resident trust in New York, then it's a resident for purposes of the PTET tax calculation. Why is this residency determination so important? In a nutshell, it's important because in calculating the Pte, a partnership is going to take all items of income gain and deduction that are allocated to a resident individual, regardless of where the income is earned. So even if the pass through partnership has income earned in other jurisdictions, because it's a multi state partnership, if the partner is a resident of New York, 100% of the distributive share is included in the PTET calculation, whereas for nonresidents, the PTET is calculated only on their New York source income using New York's three factor formula partnership business allocation as reflected on the It 2004 by the partnership. So in a nutshell, what happens is you aggregate the total of the distributive shares of all resident partners and the New York source income of all nonresident partners. The total of that aggregation is the amount of PTET that is PTET income subject to the PTET tax we're electing. However, I'm sorry.
[00:38:18.070] - Speaker 3
There have been a few questions on the residency issue, and one which I think is a great question is if you have a partnership with, let's say, New York and Florida residents, how is that PTET paid out and how does it get creditable to the partners? So would the Florida partners be eliminated from that credit and it just gets allocated directly to the New York partners.
[00:38:54.350] - Speaker 2
The answer to that is the Florida partner is going to get his or her share of the PTET based on the New York Source income of the partnership. That theoretically, that non resident partner is going to be reporting on their nonresident it 203 for New York State purposes. So again, it's the aggregate of 100% of the income ascribable to resident partners and the New York Source income of the nonresident partners.
[00:39:31.970] - Speaker 3
Okay, great.
[00:39:36.450] - Speaker 2
With respect to S corporations, s corporations aggregate all items of income gain, loss of deduction. But essentially here it's based on the New York Source income of the S Corporation. It is not based on the resident status of the shareholders of the S Corporation. So effectively, the S Corporation determines its New York Source income based on corporate apportionment rules, which is single sales factor, and market based customer based apportionment for the single sales factor. So you can see there's a big difference between partnerships which pay the tax based on 100% of resident distributors shares and only New York Source, but a non residents and Scorpions that can only pay based on the actual New York store income of the S Corporation. The PTET tax rates vary from as low as six point 85% on PTET taxable income of 2 million. And then there's a sliding scale all the way up to PTET taxable income of greater than 25 million, which is taxed at a 10.9% rate. So what happens with respect to the PTET credit when it comes to the individual partners and shareholders? First of all, the credit is equal to the direct share of the PTET that was reported by the electing entity. So each taxpayer, being a partner or a shareholder, will receive 100% credit for whatever PTET was calculated on their behalf. If the amount of the PTET credit allowable for the tax, exceeds the tax pays tax due for the year, the excess will be treated as an overpayment to be credited or refunded. So, by way of explanation, what that means is that if the pass through entity, we miss payment, let's make this off of $100,000 on December 15 of 2021. They filed the PTET return on or after March 15 of 2022. And the actual liability for PTET is $60,000. So there is a $40,000 refund. The $40,000 refund is refunded to the partnership. It is not refunded. It's not credited to the individual taxpayers. It is refunded to the partnership. So a partnership or an S corporation can't overpay the PTET in an effort to give a larger credit to the individuals. That overpayment would be claimed and reported by the pass through entity. Another important issue is for taxpayers that have elected in the past to file on a composite basis with their nonresident partners for New York. So New York has said that the PTET credit has to be claimed on an individual personal income tax return. The PTET credit cannot be claimed on the form. It is the composite group return for nonresident partners, for nonresident partners who made those elections in the past as a matter of convenience to enable them to avoid finding their own personal income tax return, might choose to instead just file their own return and extensively not join in a composite return. It's also important to note that the New York State purposes that the PTET credit is an addition modification to federal AGI or federal taxable income. So that effectively, New York is not allowing a deduction not only for the PTET, but also for any other pass through entity taxes that might be incurred for any other state. Finally, with respect to resident credits, good news is that for taxes beginning honor after 21 New York resident partners members, the shareholders will be allowed a resident credit against their New York personal income tax returns through entity taxes imposed by any other state, local government, or DC that is substantially similar to the Pte. The legislation has not at this point defined what substantially similar to the PTET is right now. However, New York has indicated that they will publish a list of the other state taxes that meet that definition of substantially similar with respect to the resident credit. Finally, I think just an observation that most states that have enacted pass through entity taxes have also enacted provisions allowing resident credits for other state pass through entity taxes. So specifically, I can tell you that New Jersey, Connecticut, California, as examples, have all indicated that they will allow a resident credit for pass through entity taxes imposed by other states. And that's an important consideration clearly with respect to making these elections, because there's always a possibility that if a partner or shareholder resides in a state that does not have a pass through entity tax, that there is substantively no guarantee that that state will allow resident credit to the pass through entity taxes that are paid and describable to that owner. So right now, back to Sean for our final polling question. Sean?
[00:47:03.890] - Speaker 1
Thanks, Harold. The final polling question of the webinar is up on your screen, and it reads, the PTET election for 2021 is due on what date? December 31, 2021, October 15, 2021, March 15, 2022, or April 15, 2022. Please make your selection now. Be sure to click the Submit button to get credit for your answer. We'll give it just a few more seconds. Make sure you click Submit. Okay, let's take a look at the results. 84.6% of the audience on October 15, 2021.
[00:48:37.330] - Speaker 2
Which is the correct answer. As a reminder for 2021, the election is due in 30 days. As Harry had emphasized earlier, for tax year 2022, the correct answer would be March 15 of 2022. And for each succeeding year, an annual election must be made by March 15 of that year onto the final segment, which is what factors or issues should be considered with respect to making the New York PTET election the first one is one I alluded to earlier. So based on New York's legislation where the owners of the pass through entity are required to make their usual estimated tax payments and then the PTET credit is also going to come into play, that certainly may result in overpayments, perhaps even substantial overpayment is for certain taxpayers. And if you view it from a certain perspective, if the PTET is made December 15 of 2021 or at any time before the end of the year, if one of the owners or any of the owners don't file their 2021 tax return until the full extended due date of October 15 of 2022, by the time New York State actually processes that over payment, you could be talking about up to a year or maybe even more than a year, that there would be perhaps an interest free loan that New York State is enjoying for 2021. That issue goes away for 2022. Next issue is, as I mentioned, the tax rate is computer on the aggregate income of the pass through entity. It's not based on each individual owner's tax situation. So, as noted, the rates can be as high as 10.9%. And depending on the individual tax situation of the owner, certain owners may be in a much lower tax bracket than 10.9%. For New York purposes, especially, let's say, less senior partners or owners that own a much smaller share of the partnership conceivably could be in a lower tax bracket, and that might result in a much higher payment that will ultimately be refunded to them. The next issue with respect to over payments, I'd like to have Tony weigh in on this one. Is that essentially the question as to how is the IRS going to view these types of overpayments? Specifically, where a taxpayer files a 2021 return to New York and there's an overpayment, what is it that the overpayment is going to be ascribed to? Will it be ascribed to the individual's personal estimated tax payments for which no tax benefit was received and conceivably, therefore, would not be taxable for federal purposes? Or alternatively, would it be that the overpayment is ascribed to the PTET credit, which arguably the taxpayer is receiving a benefit of that deduction because that deduction was netted against the ordinary income on the K One? Or is there some hybrid approach? Tony, what's your opinion?
[00:52:55.970] - Speaker 3
Yeah, we talked about this a little bit before the call, but one of the questions that came in, I want to loop it into this question because I think it's related is that what's the downside to the PTET tax? And I think what it comes down to is that there is a certain level of complication with paying this type of tax, especially when you have a partnership that has partners that come in and come out during the year, and it really needs to be traced what is paid on behalf of each partner and related to their income to what if there was an overpayment? How it gets credited back to that partner, applied back to that partner, I should say. So not only is the partnership now required to file an additional return and to have additional deadlines and additional payments and additional accounting fees for all of this work, there has to be an accountability for who these payments were made on behalf of and when refunds are brought back to the entity, how they get applied back to the partners who they relate to. So that's the complication with the whole thing. Certainly if you have a partnership that you have the same partners year over year, it's not as difficult. But you still have to keep track of how these payments are made on behalf of whom, and how they get allocated back. Even if you have the same partners in a partnership, their allocation percentages could change year over year. And so then the payments that are made on their behalf are going to change year over year. And if there are refunds coming back, that will affect that. In addition, one other point that I talked to Harold about before the call was that if you are a partner in a partnership and that partnership is making payments on your behalf and you file a joint return with your spouse, the partnership is only basing their payments on your income based on your income, not including your spouses. So that you may be in one bracket individually. But when you file your joint return, you could be pushed into a different income bracket which then creates a different liability for you at the individual level. There are complications to consider with regard to the PTET. It's not 100% the best way everybody should go, but these are just some things that need to be considered.
[00:55:57.210] - Speaker 2
And Tony, the final point is can investment partnerships claim a deduction for the PTET on page one of their 1065?
[00:56:07.710] - Speaker 3
That's a great question. I didn't even really contemplate that before the call. I don't want to do that without right.
[00:56:17.130] - Speaker 2
It's a hypothetical that I think is a little uncertain. And ostensibly a non resident and investment partnership also has no New York source income. So clearly a nonresident would probably not receive any benefit. I wanted to quickly shift over to the Q and A and let's see if we in the last three and a half minutes or so, I have time to answer these some of the questions. One question was, does a pass through entity have to be generating a profit to file the election? The answer is, well, there's not going to be any benefit if there is no profit. So at this point, let's say if there is any uncertainty as to whether for the full year an entity is going to have a profit or not, they should probably make the election, but there's no benefit to be had since the pass through entity taxes based on the profits of the pass through entity. Question is, if a partnership has a New Jersey partner, can this apply to New Jersey partner? The answer is yes. However, again, the benefit is based on the New York source income ascribable to that partner, not on the total income of that partner. I think we covered where and when you can make the election and the fact that an accountant cannot make the election. Question was does the non resident partner or member get for dollar benefit? The answer is yes. It's 100% credit that is passed through.
[00:58:18.730] - Speaker 3
Right. So again, back to the point that the partnership income comes up to the 1040 on a Schedule E, and that is one number that does not get included as an itemized deduction as previously, which would have been limited.
[00:58:38.390] - Speaker 2
There's a question if your partnership has income, say a million, so let's say $100,000 is the income tax that would be due. However, if the partners have income outside the partnership of another 2 million, but the partnership pay 300,000, the answer is no. That the partnership can only pay on the PTET taxable income generated through the partnership. Question is, does New York City UBT fall under PTET? No, it does not. That's an entity level tax imposed by New York City. Question is the signed election for each partner in the partnership difference for an equity partner versus an income partner? The answer is no, that guaranteed payments are included in the calculation of the PTET. So effectively the election is the same. Both question is, if my S Corporation has a November 30 fiscal year end, can I take advantage of this for the current year or do I have to wait until my subsequent tax year beginning December 1, 2021? So again, the PTET is a calendar year tax which is based on the fiscal year ending in that calendar year. So if your S Corporation as the fiscal year ended November 30 of 2021, you can elect for 2021 and the election is due October 15 to make the PTET election. Question is, if an S Corporation usually pays salaries to an S Corp. Shareholder as it's affected PTET income and IRS saying no PTET. Well, if an S Corporation is paying out its income in salaries and zeroing out its income, then clearly it's not going to have any PTET taxable income. So that might be something that an escort might want to revisit as to whether they want to pay out all of that income in the form of salaries just to reiterate the rates for PTET or on an aggregate not her partner. It is based on the aggregate income of all the partners and I think that probably covers most of the questions that were answered. Clearly any of the participants in today's webinar will be happy to answer any of your other questions. Just to summarize before I turn it back to Sean, this is clearly a possibly significant benefit that owners of passthrough entities can enjoy by making the pass through entity tax election. None of us have a crystal ball as to whether there will be any change in the salt limitation or not. And for that matter, if there is, what the effective date would be. So please keep in mind October 15 is the drop dead due date with respect to making the PTET election. We really appreciate everyone joining us. Sean, back to you.
[01:02:34.910] - Speaker 1
Thank you, Harold. We hope everyone enjoyed today's webinar. Thank you to all of our speakers. If you've completed the CPE requirements, your certificate is now available for download. You'll see the instructions on the screen now. If you're a Mazar's employee, no need to download the certificate. We also encourage you to tell us what you thought about today's webinar by completing our feedback form, the link to which you will see on the screen shortly. Please take a minute and click that link once we conclude here. Feel free to reach out to any of today's presenters or myself with any further questions. Thank you once again and enjoy the rest of your day. Stay well, everyone.