Optional Pass Through Entity Tax (PTET)
15 September 2021Earlier this year New York State introduced an optional 'Pass-through entity tax ("PTET")' that partnerships or New York S Corporations may annually elect to pay on certain income for tax years beginning on or after January 1, 2021. This type of tax has been enacted by a number of states and is generally designed in response to the $10,000 cap on the federal state and local tax (SALT) deduction as added by the Tax Cuts and Jobs Act (TCJA) in 2017. The choice to pay the PTET is done on an annual basis and is irrevocable.
If an eligible partnership or eligible New York S corporation (electing entity) elects to pay the PTET, its partners, members, or shareholders subject to New York State tax under Article 22 (personal income tax) may be eligible for a PTET credit on their individual NYS income tax returns.
As the New York State Department of Taxation and Finance recently issued guidance (see TSB-M-21(1)C) about how and when to make the election for 2021 and future periods, we wanted to provide a brief summary to keep you informed.
Who may make the election?
• S-Corps - any officer, manager, or shareholder with the authority to bind the entity or sign returns
• Partnership - any member, partner, owner, or other individual with authority to bind the entity or sign returns
When do you make the election?
• 2021 Tax year - An eligible entity may opt into the PTET no later than October 15, 2021
• Tax Years beginning on or after January 1, 2022 - An eligible entity may opt in on or after January 1, but no later than March 15th of that year
• *Unique rules for fiscal year eligible entities*
How to make the election?
• An authorized person can opt in to the PTET on behalf of an eligible entity through the entity's Business Online Services account. If the entity does not have a Business Online Services account, the authorized person will need to create one.
Pros of the Election:
• As the entity elects to pay the tax, it becomes a deduction on the pass-through return based on the pass-through entities' overall method of accounting
• A partner/shareholder of an electing pass-through entity is entitled to a credit against New York personal income tax equal to such partner’s/shareholder’s “direct share” of the PTE tax. The New York PTET credit is a dollar for dollar credit. A partner/shareholder who claims a PTET credit must add back the amount of the credit, increasing federal adjusted gross income by such amount in computing New York taxable income.
Cons of the Election:
• 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. This may create a significant cash flow concern for businesses and their owners
• The PTET return may not be amended without consent of or otherwise authorized by the Commissioner
• Other states may not provide a tax credit for the PTET payments at the individual level. Therefore, eligible entities with nonresident partners/shareholders will need to evaluate the potential ramifications.
If you are interested in understanding the PTET's impact on your business for 2021, please contact us as soon as possible ahead of the October 15th deadline.