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Changes to NY State PTET in 2022 Budget Bill

The Budget Bill was signed into law on April 9, 2022. Included in the tax provisions are two key changes to the Pass-Through Entity Tax (PTET):

S Corporations with Resident Shareholders

Unlike partnerships, S corporations must allocate all items of income and deduction pro-rata based on stock ownership. Therefore, NY resident shareholders, who are subject to state income tax on all of their income, cannot be treated differently from nonresidents, who are only taxed on income allocable to the state. As a result, the PTET base for S corporations under the original law only allowed for allocated income of all shareholders to be used in the PTET calculation, reducing the potential federal tax deduction as compared to partnerships with resident partners.

Because this change greatly expands the number of entities that can benefit from the PTET election, a subsequent bill was passed that extends the 2022 election deadline to September 15, 2022, provided the required estimated tax payments are made with the election.

Under the new law, If an S corporation that elects to pay the PTET certifies that all of its shareholders are residents of New York, then the PTET tax base is expanded to include all items of income, gain, loss or deduction to the extent they are included in the taxable income of the shareholder subject to New York’s personal income tax.

To be considered an electing resident S corporation, an S corporation must certify at the time of its PTET election that all shareholders are residents of New York.

For this year only, the certification to be taxed as an electing resident S corporation for this year must be made by March 15, 2023. 

Example 1: ABC Inc., a New York S corporation, has three shareholders: A and B, who are NY residents, and C, who is  a Florida resident. ABC’s NY business allocation percentage for  2022  is 5%. Even though 2/3 of the shareholders are NY residents, ABC’s PTET base calculation reflects only 5% of its taxable income because it has at least one nonresident shareholder and must be treated as an electing standard s corporation. 

Example 2: In 2023, C becomes a full-year NY resident, and ABC certifies that all of its shareholders are residents when it makes its 2023 PTET election by March  15, 2023. As a result, 100% of its income will be included in the PTET base regardless of its business allocation percentage. 

New York City Changes

Effective for tax years beginning in 2023, there will be a new optional City Pass-Through Entity Tax (CPET). This will provide for an entity-level federal deduction for the NY City personal income tax of resident partners and shareholders attributable to their share of the entity’s income.

The CPTET tax base for partnerships is the sum of the un-apportioned and un-allocated pro rata shares of the partnership’s income flowed through to partners who are individual residents of New York City.

Only those S corporations whose shareholders are all City resident shareholders are eligible for the CPTET;  the tax base for S corporations is all of the income of the S corporation, un-apportioned.

The tax rate is 3.876%. City resident owners of electing entities are entitled to a credit against their City personal income tax equal to their direct shares of the entity’s CPTET.

The annual due dates for estimated taxes and returns are the same as for the PTET.

If you would like additional information please contact your Gettry Marcus Advisor.