New York State enacts significant changes to SALT Cap workaround

New York Governor Kathy Hochul signed two pieces of tax legislation that amend and enhance the state’s pass-through entity tax (PTET) by creating a new S corporation category for entities with all resident shareholders; excluding pass-through entity taxes from the definition of “income taxes” for purposes of the addback to state taxable income; extending the deadline for electing the 2022 PTET; enacting an estimated tax requirement for taxpayers making the 2022 election after March 15, 2022; and, for New York City (NYC) resident individuals, the legislation establishes a new NYC PTET.

New electing resident S corporation category

For tax years beginning on, or after, January 1, 2022, an electing resident S corporation, as defined below, will include in its PTET taxable income all items of income, gain, loss, or deduction to the extent included in the taxable income of the resident shareholders.  Previously, PTET taxable income for S corporations only included the apportioned, New York-source income for all shareholders, regardless of resident status.

An “electing resident S corporation” certifies at the time of its election that all of its shareholders are residents of New York. If such a certification is not made, the corporation will be treated as an “electing standard S corporation” and only its New York-source income will be included in PTET taxable income. 

Pass-through entity tax addback

New Tax Law Subsection 612(b)(3)(C)  provides that, at the entity level, the term “income taxes” in the case of a partner, member, or shareholder of an electing partnership or electing S corporation does not include the New York PTET or other state pass-through entity taxes to the extent it is added back under Section 612(b)(43), which is the PTET deduction addback required on an individual’s New York personal income tax return.

Extended due date for 2022 PTET elections

As originally enacted, the tax law required a resident S corporation to make its election for the 2022 tax year by March 15, 2022, which was prior to the April 9 legislative enactment of the resident S corporation provision. Consequently, the state has amended and extended the election due date to September 15, 2022, allowing resident S corporations and all other eligible entities, including partnerships, to make an election for the current tax year. 

PTET estimated tax requirement

The new tax law also provides that for tax year 2022, a PTET election that is made after March 15, 2022 and before June 15, 2022 will only be valid if, with the election, an estimated tax payment is made that is 25% of the required annual payment. Additionally, if an election is made after June 15, 2022 and before September 15, 2022, then a payment of 50% of the required annual payment must be made with the election to be valid. 

New York City PTET

Effective for tax years beginning on or after January 1, 2023, New York City will offer a pass-through entity tax that will be imposed at the highest city marginal tax rate of 3.876%.  The City PTET is in addition to the City Unincorporated Business Tax imposed on partnerships and the General Corporation Tax imposed on S corporations.

An annual NYC PTET election may be made by an “eligible city partnership” or an “eligible city resident S corporation.” An “eligible city partnership” is defined as any partnership as provided for in IRC Section 7701(a)(2) that has a New York State partnership return filing obligation under Tax Law Section 658(c)(1), where at least one partner or member is a city resident. An “eligible city resident S corporation” means any New York S corporation that is subject to tax under Tax Law Section 209 that has only city resident individual shareholders.  Partnerships and S corporations making New York State PTET elections may also make separate city elections, with similar timing to the state elections.

The City PTET base includes all items of income, gain, loss, or deduction that are included in the city taxable income of a partner, member, or resident shareholder of the electing city taxpayer. A credit is available to resident partners, members, or shareholders against their personal income tax equal to their direct share of the NYC PTET. 

Mazars’ insight

New York’s revisions to the State PTET, extension of the election date, and enactment of the City PTET create additional SALT workaround opportunities for qualifying taxpayers.

Taxpayers should consider their specific tax structures to determine if they could benefit from participating in the New York State or City PTET workarounds.

Please contact your Mazars professional for additional information.

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.