NYS Pass-Through Entity (PTE) Tax Considerations

By Alan R. Sasserath, CPA, MS and George Batas, CPA

On April 19, 2021, New York Governor Andrew Cuomo signed into law the FY 2022 budget which denotes changes to the state’s corporate and personal income tax provisions. One of the changes includes the highly anticipated Pass-Through Entity (PTE) Tax election, which will allow partnerships and New York S corporations to work around the $10,000 state and local tax (“SALT”) deduction limitation.

The new PTE tax election is effective for tax years on or after January 1, 2021. Elections are to be made annually and once made, are irrevocable for that year. The current election due dates are as follows:

  • For 2021, election to be made no later than October 15, 2021.
  • For future calendar years, by March 15th.

Election Overview

The PTE tax election is made at the entity level for eligible partnerships and S corporations. For partnerships, corporate partners are excluded from the election. The PTE tax election only applies to individual partners as outlined below:

  • Non-resident partners: New York sourced income.
  • Resident partners: All income included in the taxable income of a New York resident partner.

If elected, all partnerships/shareholders are opted in as there is no mechanism to elect out.

For S corporations, the election must be made by an authorized manager, shareholder, or officer.

Tax rate (based on aggregate income)

The PTE tax is imposed at the following rates:

  • 85% on income up to $2,000,000
  • 65% on income from $2,000,001 – $5,000,000
  • 3% on income from $5,000,001 – $25,000,000
  • 9% on income over $25,000,000

Estimated Tax Payments

The law provides that in 2021, electing PTEs are not required to make estimated tax payments. However, PTE owners are still required to make estimated tax payments for 2021. In other words:

  • The individual estimated tax penalty is calculated without regard to the PTE tax credit; and
  • If the individual owner wishes to avoid the estimated tax penalty, they will likely have an overpayment on their New York personal income tax return equal to their New York tax liability.

Even though estimated tax payments are not required for 2021, cash basis entities may have to make a payment by December 31, 2021, to ensure a 2021 tax deduction.  Currently, there is no mechanism to make such a payment.

Partnerships/S corporations are advised to obtain estimated tax waivers from all its non-resident partners to ensure that they are not liable to pay estimated tax payments, too.

New York State permits residents to claim non-resident credits against their tax liability for similar PTE taxes paid to other states. However, other states may or may not permit such a credit.

Tax Credit

The PTE tax paid at the entity level will be allocated to each individual owner as a refundable credit against their New York State tax liability. If there is a refund of a portion of the credit referred to above, such amount should be included in Federal taxable income in the year received.  Please note that this is our interpretation of the rule and individual owners should consult their tax advisors. Such credit will be required to be added back to their New York State taxable income.

The IRS released guidance in November 2020 approving that PTE taxes paid at the entity level are deductible for federal tax purposes. Pass-through entities should analyze the rules in each state they have nexus and/or shareholders in to determine whether it will be beneficial to make the election. Although we are still waiting for additional guidance on the NYS PTE rules, it is important to get an understanding of how this can benefit the partners/shareholders of your company. As additional guidance is released, we will keep you updated.

If you have any questions about the application of these regulations, please contact us at 631-368-3110. As always, we are available to help.

 

Sasserath Joins CMM Cares, Inc.’s Board of Directors

CMM Cares, Inc. has announced the election of Alan R. Sasserath, CPA, MS, Partner at Sasserath & Zoraian, LLP, to their Board of Directors. CMM Cares is a 501(c)3 and major supporter of veterans, children, and the arts on Long Island through fundraising, volunteering, and awareness campaigns. With the addition of Sasserath to its Board, CMM Cares is poised to make an even more significant impact within the community in 2021.

Sasserath, Partner at Sasserath & Zoraian, LLP, brings over 30 years of public accounting firm experience to his role with CMM Cares. With his strong background in accounting, tax, audit, and financial planning and his experience taking both Long Island and international businesses to the next level, Sasserath brings critical technical expertise to CMM Cares’ philanthropic efforts.

“Alan Sasserath has been an integral resource for businesses on Long Island,” said Victoria Tringone, Executive Director of CMM Cares. “We are excited to have him join the Board of Directors to bring our ideas and initiatives to the next level.”

At the start of the year, Sasserath was also elected to the Board of Directors for HIA-LI, a nonprofit member group of local businesses who aim to be a powerful force and economic engine for regional development on Long Island. An active supporter of various organizations, Alan is also a member of New York State Society of CPAs (NYSSCPA), SBC Global Alliance, International Tax Practitioners, and American Institute of Certified Public Accountants (AICPA).

Employee Retention Credit & Paycheck Protection Program Loans

Getting Ahead of the March 31st Deadline for Each

By Alan R. Sasserath, CPA, MS

A number of our friends and clients were/are eligible for Paycheck Protection Program (“PPP”) second draw loans AND the expanded Employee Retention Credit (“ERC”). March 31, 2021 is a critical day for each program.

With regard to the ERC, March 31st marks the end of the first quarter of 2021 that a taxpayer could be eligible for the 2021 expanded ERC. The general requirements (very high-level) to be eligible for this credit are: (1) that the taxpayer have a greater than 20% decline in gross receipts for the first quarter of 2021 when compared with the first quarter of 2019 and (2) have less than 500 employees. Even if a taxpayer applied for and received a second draw PPP loan, they can use wages paid during the first quarter of 2021 that will not or cannot be used for PPP loan forgiveness towards the ERC. The ERC is significant in that it could be worth up to $7,000 per employee per quarter.

If a taxpayer believes they will qualify for the ERC in Q1 2021, we are advising clients to contact their payroll company before their last payroll in March so they can claim the credit with the filing of the quarterly payroll tax return. Some payroll companies have sent information out regarding the ERC. Our concern is that if the payroll company is not notified ahead of time and they file the payroll tax return in the ordinary course of business (sometimes shortly after the last payroll of the quarter), then the taxpayer will be forced to claim the ERC on an amended payroll tax return. If the IRS gets flooded with such amended payroll tax returns, we don’t know what the processing time on those amended returns could be. That is why we think it is critical to get ahead of this now.

Current processing times for amended personal income tax returns are unusually long. We have clients that filed amended income tax returns in May of 2020 that are yet to be processed. The amended payroll tax returns will go to a different unit at the IRS, but again, who knows what they are prepared for and what kind of volume they will have to process.

With regard to the PPP, March 31st is the deadline for applying for second draw PPP loans. While the SBA provides PPP guidelines, each lender has their own rules regarding the application process. If you haven’t applied for the second draw PPP loan or have been holding off for one reason or another, do not miss this deadline! It is important to contact your lender now and find out the requirements for applying if you have not already done so.

As always, we are available to help. Don’t hesitate to contact us at 631-368-3110.

S&Z Welcomes George Batas as Partner

Sasserath & Zoraian, LLP, a New York CPA firm providing accounting, tax, and business advisory services, is pleased to announce that George Batas has been promoted to Partner as of January 1, 2021.

George Batas joined Sasserath & Zoraian in 2017, where he quickly became instrumental in establishing and running the firm’s State and Local Tax (SALT) department as well as working with international clients. He prides himself on being a critical resource for clients as they expand their businesses throughout the world.

“When I joined S&Z, my dream was always to become a partner. After 4 years of working with some of the brightest partners and staff in the industry, I have managed to complete this dream. I look forward to continue growing both on the individual and firm level,” said Batas.

Batas will continue to focus on growing their International and SALT departments upon his new role. Batas has in-depth experience advising closely held businesses as well as high-net-worth individuals on a wide range of complex tax issues. His work includes the preparation of sales tax returns for all states, nexus consultation and analysis, exposure analysis, voluntary disclosures for sales tax and income tax, sales tax audits, residency audits, and state registrations. Most recently, he has dedicated himself to understanding the ins and outs of the Paycheck Protection Program (PPP), helping clients maximize their loan forgiveness during a time of unprecedented financial strain.

Batas also provides accountant services to the firm’s numerous international clients, particularly on the corporate side. He works with clients to prepare to establish U.S. operations including registration with state authorities, applying for EINs, registering for sales tax collection, registering for payroll tax, and helping familiarize clients across the globe with the U.S. tax system.

George brings tremendous talent, dedication, and experience to the firm which strengthens the depth and knowledge of our partner group,” said S&Z Partner Alan Sasserath. “We look forward to his helping the firm to continue to evolve and grow in the years to come.”

Paycheck Protection Program (“PPP”) First and Second Draw Applications and Timing

By Alan R. Sasserath, CPA, MS and George Batas

It is tough for us to believe we are writing about new PPP Loans again, but here we are.

 

First some housekeeping, there are two types of PPP loans referenced in the latest guidance. “First Draw” PPP loans refer to the borrower’s first application whether received in the initial funding in 2020 or now, in 2021. “Second Draw” PPP loans refer to the borrowers that already received and spent the First Draw PPP loans. Requests for increases in a First Draw PPP loan would fall in the First Draw PPP loan application pool and are permitted in certain instances.

 

The SBA will open its portal to accept First Draw PPP loan applications from community banks today. On Wednesday, January 13th, the SBA will open its portal to accept Second Draw PPP loan applications. The SBA will open its portal to all banks shortly.

 

The current First and Second Draw PPP loan applications are linked below.

 

Eligibility requirements for the First Draw PPP loans have not changed. The requirements, in general, continue to be eligible small entities that have 500 employees or less or meet the alternative size standards.

 

In general, eligibility requirements for the Second Draw PPP loans are entities that:
  1. previously received and used a First Draw PPP loan on qualified expenses prior to the disbursement of the Second Draw PPP loan;
  2. are eligible small entities that have 300 employees or less; and
  3. can demonstrate at least a 25% reduction in gross receipts between the same quarter in 2019 and 2020.

 

If you think you are eligible for a First or Second Draw PPP loan, you should be in contact with your bank and financial advisors to assist you with the process. If you went through the process with a First Draw PPP loan, you should be reaching out to whomever you worked with on that.

 

We strongly suggest that you reach out to your advisors regarding this as soon as possible. While the applications are straightforward as they were the first time, there are always nuances. An example of one such nuance pertains to entities that are planning to use supplier costs to assist with PPP loan forgiveness. Under the latest guidance, an entity is permitted to use the cost of supplies that are essential to the operations of the entity at the time at which the expenditure is made when such expenditure is made pursuant to a contract, order, or purchase order in effect at any time before the covered period (the date that you received the First or Second Draw loan) with respect to the PPP loan. Our point is that you want your contracts, orders, and purchase orders to be in place prior to receiving the First or Second Draw PPP funds so you can use the related expenditures that occur in the 8-week to 24-week period following funding to assist with PPP loan forgiveness. If the contracts, orders, and purchase orders are not in place at the time funds are received, then such expenditures cannot be used unless an exception is met.

 

As always, we are here to help. If we can assist you in any way, please feel free to contact us.

 

 

Paycheck Protection Program Webinar – December 2020

Congressional leaders have reached a long-awaited agreement on a $900 billion stimulus package. The measure is expected to provide more than $284 billion for businesses and revive the Paycheck Protection Program (PPP), a lifeline federal loan program for small businesses that lapsed over the summer.
On December 23, 2020, Sasserath & Zoraian, LLP gave an informative webinar where Alan R. Sasserath explained the critical details you need to know about this new round of PPP, as well as updates to the existing PPP loan program.
Topics included:
  • Eligibility for “second round” PPP loans
  • Additional eligible expenses for existing PPP loans
  • Tax implications of PPP loans
  • Simplified forgiveness application
  • 501(c)(6) non-lobbying organizations
Below you will find the presentation materials and a video replay. We hope this information is helpful to you and as always, please contact us if we can be of further assistance.