New York Issues Guidance on the New Pass-Through Entity Tax (PTET)
As part of the 2021-2022 budget law enacted last April, New York State created a new optional pass-through entity tax, similar to those initiated recently by several other states. Based on guidance issued by the Treasury in 2020, these taxes are designed to avoid the $10,000 limit on the itemized deduction for state and local taxes of individuals, estates, and trusts. The State has recently issued guidance on the operation of the PTET, and has now opened the online portal allowing pass-through entities to elect into the tax for 2021. Following are key provisions of the PTET:
- It is an elective entity-level tax designed to avoid the federal $10,000 SALT cap by shifting the state tax to the entity and treating it as an “above-the- line” tax.
- The election is available for partnerships and S corporations that are required to file New York (NY) returns either because they have NY- source income, or NY resident partners.
- The tax is imposed, at graduated rates, on income allocable to partners and shareholders that are individuals, trusts and estates. Other pass-through entities and corporations are excluded. The entity’s partners/shareholders receive a refundable credit for their share of the entity’s tax.
- For partnerships, all income allocable to NY residents is subject to tax; only NY-source income allocable to nonresidents is taxable. For S corporations, only income allocated to NY is subject to tax, regardless of the shareholders’ residency status.
- The election is made annually. The only drawback to making the election is the compliance cost of additional filings, etc. There is no benefit for an entity that has a loss or very little income for the tax year.
- A separate election must be made for each pass-through entity that files a NYS return. For the tax year beginning in 2021, the election must be made by October 15, 2021. For subsequent years, the election must be made within the first two months and fifteen days of the tax year (March 15 for calendar-year filers.)
- The election can only be made by a person who is generally authorized to sign the entity’s tax return (i.e., corporate officer or partner/LLC member.) It cannot be made by the outside CPA, attorney, etc., and must be made through the eligible entity’s NY Business Services Online account.
- No estimated tax payments are required for 2021, and the partners/shareholders will not receive credit for the PTET for purposes of calculating penalties for underpayment of estimated tax. Quarterly estimated tax payments will be required beginning in 2022. However, cash basis entities will have to make a payment by December 31, 2021 in order to get the deduction in the current year. The ability to make estimated payments through the NY Business Online Services account should be available December 15, 2021.
- The initial annual return and balance of tax are due by March 15, 2022. A six-month extension of time to file is available.
If you would like additional information please contact your Gettry Marcus Advisor.