New for the 2021 tax filing, New York implemented a Pass-Through Entity Tax (PTET) that is an optional program allowing a pass through entity to pay NYS taxes, provide a full Federal Tax Deduction on those taxes, and provide a credit for taxes paid on the owners/members/partners tax returns. You can find a summary of the program here.
On August 25, 2021 the New York State Department of Taxation and Finance issued TSB-M-21(1)C, (1)I providing guidance on the PTET and this post provides the highlights of this guidance.
Highlights of the TSB are as follows:
- Annual election – eligible entities must opt in to this program annually and it is irrevocable.
- Election Due date – by March 15 of the tax year, ie. 2022 tax year is due on March 15, 2022.
- 2021 election only – due October 15, 2021. Since the PTET is new in 2021, the election for 2021 must be made by October 15, 2021.
- How do you make the election? – An authorized person MUST opt in to PTET on behalf of an eligible entity through the entity’s Business Online Services account, now through October 15, 2021. If the entity does not have a Business Online Services account, the authorized person will need to create one. You can create one at this link. https://www.tax.ny.gov/online/
- Who is an authorized person? – Only an authorized person may make this election on behalf of an eligible partnership or S corporation. Please note that an authorized person does not include your tax professional.
- New York S corporation – 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 and who represents to having that authorization under penalty of perjury.
- Partnership/ Limited Lability Company – If the entity is a partnership any member, partner, owner, or other individual with authority to bind the entity or sign returns under Tax Law § 653.
- How do you calculate the income subject to the tax? – 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.
- 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 (Personal Income Tax).
- Partnership – An electing partnership is required to classify all direct members or partners that are taxable under Article 22 (Personal Income Tax) as a resident or nonresident of New York. To compute its PTE taxable income, an electing partnership must compute both a resident PTE taxable income pool and a nonresident PTE taxable income pool and add these amounts together.
- What is the tax rate paid? – The PTET is 6.85% on $2,000,000 or less of PTE taxable income, and the tax rate increases at various levels up to a maximum of 10.9% on PTE taxable income greater than $25,000,000.
- Are Estimated Tax Payment Required? An electing entity is required to pay estimated tax on the amount of PTET calculated for the current taxable year. Estimated payments are due on or before March 15, June 15, September 15, and December 15 for that calendar year.
- 2021 only – An electing entity is not required to make any estimated tax payments for PTET for tax year 2021. However, it may choose to make optional online estimated tax payments prior to December 31, 2021 (cash basis taxpayers that want to deduct the PTET on the 2021 tax return). An online estimated tax application for PTET will be available by December 15, 2021.
- Should I stop paying my personal estimates for NY in 2021? NO – 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. Failure to pay personal estimates in 2021 will result in tax penalties. Personal income tax estimated payments are not considered prepayment of PTET and may not be applied to PTET liabilities.
- What tax return is required? On or before March 15, an electing entity must file an annual PTET return using the online return application to report the information required for the PTET taxable year. All PTET tax returns are filed on a calendar-year basis. An electing entity may make an online request by March 15 for a six-month extension of time to file its annual PTET return. At this time it is not clear whether this return will be filed with the entity CT3S or IT-204, or whether a separate filing within NYS online services will be required.
- How do I claim the credit on my personal return? Eligible taxpayers that receive a PTET credit from an electing entity may claim the credit on Form IT-653, Pass-Through Entity Tax Credit, and attach it to their New York State personal income tax return.
- A partner, member or shareholder that is not subject to tax under Article 22, including but not limited to a corporate partner, is not eligible for the PTET credit. Additionally, a partner that is itself a partnership is not eligible for the PTET credit.
- Is the PTET tax deductible on the NYS return? NO – 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.
- What about PTET paid to another state? 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 information is just a summary of the long awaited guidance. Additional guidance and required forms will be posted on the department’s website as it becomes available.
If you have any questions please contact your TBC advisor.