By Scott Lewis, CPA, MSA
New York (NY) has recently enacted a Passthrough Entity Tax (PTET) for tax years beginning after January 1, 2021. The new law, which falls under Article 22 and 24-A of the New York tax law, allows eligible partnerships and S-Corporations to make an annual election to pay this entity-level tax on behalf of their partners or shareholders. An on-line election (https://www.tax.ny.gov/) must be made each calendar year on or before March 15th. The election, once made, is irrevocable for that taxable year. For the 2021 tax year only, the election must be made no later than October 15th, 2021, and no estimated taxes are required to be paid (but are allowed, see below). After October 15th, 2021, the first estimated tax quarterly payment and the annual election for the 2022 tax year are due by March 15th, 2022.
Versions of this elective PTET have been allowed by many states, which allows partners, members, and shareholders (including disregarded entities) of electing partnerships and S Corporations to indirectly deduct state and local taxes (SALT). These amounts have been limited at the individual federal level due to the $10,000 cap on the itemized deduction for state and local taxes paid, which was part of the Tax Cuts and Jobs Act (TCJA). These PTET payments represent a tax deductible expense to the passthrough at the federal level.
The payments at the passthrough level, for purposes of calculating NY state taxable income, will be an addback to federal income. NY and other states have historically considered such addbacks in determining state income. However, as drafted, this PTET credit must be added back again at the New York individual taxpayer state level, in essence, creating a double addition to income. For example, taxable federal income reported to the taxpayer from the passthrough is $100,000, and of this amount, $10,000 of PTET expense was deducted. NY taxable income would be $110,000. In addition, the taxpayer must addback the $10,000 again as the “beneficiary” of this PTET credit, resulting in taxable income for NY state of $120,000. The taxpayer is using this PTET amount to reduce the amount of cash they would have been required to pay directly for NY taxes. Further guidance on this has been requested from the state.
Eligible passthrough entities can make the estimated PTET payments electronically for 2021 on behalf of the ultimate taxpayer. The guidance from the NYS Department of Taxation and Finance notes that the State’s ability to receive these payments should be available no later than December 15th, 2021, at which time, payments can be made based on the estimated tax for the full year of 2021. The payment of the PTET, in 2021 only, does not relieve the taxpayer of still making their regularly scheduled estimated NY state tax payments. These monies would presumably be refunded and/or applied to future tax liabilities when filing their 2021 individual tax return in 2022. This could present a significant use of cash flow in 2021, as payments are essentially being paid twice, so taxpayers should take considerable care when deciding whether to make the election and payments for 2021.
After 2021, quarterly estimated tax payments will need to be made by the passthrough entities online by the 15th of March, June, September, and December, regardless of whether they are a calendar or fiscal year filer. The annual, irrevocable election must be made by March 15th annually.
The tax estimates are based on formulas for taxable income which are generally calculated at the passthrough level, considering income, deductions, gains and losses, etc. There are graduated rates to be paid based on the NY sourced income, ranging from 6.85% on taxable income under $2 million to 10.9% on taxable income greater than $25 million. Going forward, the amount of estimated tax would also be based on 100% of the prior year, or 90% of the current year, whichever is less, very similar to how estimated taxes are determined now for purposes of underpayment penalties.
The electing entity must file a PTET annual return by March 15th, or September 15th, with a requested six-month extension. It is an information return, disclosing sufficient identification information such as names, identifying numbers, etc. to ensure that their eligible taxpayers can claim the PTET credit on their NY tax return. Eligible taxpayers will need to attach Form IT-653, Pass-Through Entity Tax Credit, with their NY individual tax returns.
As noted above, the PTE tax credit goes into effect for the 2021 taxable year and should be addressed as soon as possible, as elections for 2021 are due by October 15th, 2021. If you have any questions on how this impacts you or your pass-through businesses, please click HERE to contact us.