The New York State’s Pass Through Entity Tax (PTET) program allows eligible partnerships and S corporations to pay tax at the entity level to provide tax deductions that may otherwise be disallowed when the income is reported on the partners’/shareholders’ personal returns. The program allows the partners/shareholders the ability to deduct New York State taxes paid on their federal tax return by reducing total income from the electing entity. In addition, the business taxes paid will be allowed as a credit against the New York State tax due on the New York personal income tax return
This program was a direct result of the enactment of a controversial provision of the Tax Cuts and Jobs Act (TCJA) limiting the itemized deductions related to state taxes to $10,000 (real property taxes plus state & local income taxes) per year. A number of states, including New York, responded by enacting a pass through entity tax (PTET) on S corporations and partnerships (including multi-member LLCs) to help benefit the direct owners impacted by the tax limitation.
New York State’s version of this program was created for tax years beginning on or after January 1, 2021.
Electing into the PTET Program and Required Estimated Payments
To file and pay PTET tax, the eligible partnership or S corporation must make an irrevocable annual election by March 15 for the current calendar year, this includes fiscal year filers. For the 2022 year only, the election period has been extended to September 15, 2022.
Electing entities are required to make four equal estimated tax payments for every quarter of a calendar year due on March 15, June 15, September 15 and December 15, regardless of whether the entity has a calendar or fiscal year-end.
If the entities are making the PTET election under the extended deadline estimated PTET payments are required or the election will be deemed invalid. The “late” election occurring between March 16th and September 15th , 2022, requires the entity to make an estimated tax payment equivalent to 75% of their annual PTET tax by September 15th.
It is important to remember that an authorized representative, not a tax professional, of an eligible entity must make an election to file the PTET tax every year on the entity’s NYS online account. Once the election has been made for a tax year it cannot be revoked and any payments must be withdrawn electronically from the entity’s bank account.
PTET Annual Return
The PTET tax return is due on March 15 of the following year (the 2022 return is due March 15, 2023); fiscal year taxpayers will file by March 15 following the close of the calendar year that contains the final day of the entity’s tax return. A six month extension may also be filed.
The return is filed using the NYS online tax portal. Filing requires the calculation of the NYS taxable income, the names and the Social Security Numbers or Employer Identification Numbers of the partners/shareholders receiving the PTET tax Credit.
Calculating PTET Tax Due and Corresponding Credit
There are two different calculations of the PTET tax depending on entity type and whether the partners/shareholders are residents or nonresidents of New York State. In general, it is the amount of New York sourced income included on the partners/shareholders individual tax returns times a graduated rate starting from 6.85% on the first $2 million of a PTE’s taxable income up to a maximum of 10.9% on taxable income in excess of $25 million.
A NYS tax credit is available for a direct partner or shareholder of an electing PTE; the credit is based on their distributive share of the PTE taxes paid by the entity. Both resident and non-resident owners may be entitled to this credit. If an individual is a partner/shareholder in multiple electing entities, his or her total credit is equal to the sum of such credits calculated separately for each entity. If the credit exceeds tax due for the taxable year, it should be treated as an overpayment, which can be credited or refunded, without interest.
Any individual that is claiming a tax credit for PTE taxes paid must have a corresponding NY addback of the amount of the PTE tax deduction (while the PTE tax is deductible in computing a PTE owner’s federal taxable income, it is not allowed as a deduction in computing such owner’s NYS taxable income).
The mechanics of this election are complicated and we recommend that you contact your TBC Advisor to review whether this election is right for your tax situation.