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.

 

Your 2020 Personal and Small Business Tax Strategy: Key Opportunities, Trends and Challenges

By: Lynn Montag

Tax season for 2019 may be in full swing, but it’s never too soon to start thinking about your 2020 business tax strategy. A new year means new tax challenges and opportunities for small business owners, so it’s best to understand recent tax code changes right at the beginning. Although different tax rules apply based on business structure, in general small business owners are responsible for sales tax; payroll tax; self-employment tax, which goes towards Social Security and Medicare; excise tax; federal and state (if applicable) income tax; property tax; and taxes on capital gains and dividends. Per the IRS, all businesses large or small, turning a profit or not, must submit an annual income tax. The exception to this rule is partnerships which are required to file an information return instead.

The top things small business owners should keep in mind for 2020 are: 1) changes to the tax code from the 2017 Tax Cuts and Jobs Act (TCJA) impact deductions for pass through companies; 2) state and local tax (SALT) deductions are limited to $10,000; 3) commuters can no longer deduct their ride to work as a “qualified transportation fringe benefit”; and 4) there a new international tax considerations to deal with if you’re an American corporation.

  1. TCJA impacts deductions for pass through companies

For small business owners, recent changes to business deductions could have a huge impact in 2020. As a result of the TCJA, the corporate tax rate was cut from 35% down to 21%. If you are taxed as a c-corporation, this 14% drop could have a major impact on your bottom line. Although this flat rate mostly affects large businesses and corporations, the TCJA also changed the limits on interest deductions and net operating losses for pass-through companies – companies where taxes are passed-through to shareholders and owners – which make up most small businesses in the U.S. Under the TCJA for 2019, joint tax filers who have taxable income below $321,400 (or below $160,700 for individual filers) now qualify to deduct 20% of their qualified business income (QBI) from their annual taxes. If you plan to take advantage of this 20% deduction and your business’ taxable income falls above the thresholds mentioned, please contact our team to determine whether you qualify through other exceptions.

  1. SALT deductions are capped at $10,000

In high-tax states such as New York, California and New Jersey, the SALT deduction restriction could impact you and your small business. As of last year, for the first time ever SALT deductions were capped at $10,000 for combined property taxes plus either state income or state sales tax. For states with high property, income or sales tax, this could seriously limit the amount of federal deductions you are entitled to.

Additionally, if your business owns property overseas, under the new SALT deductions you can no longer deduct foreign real estate taxes from your U.S. tax return.

  1. Fringe benefit deductions for commuters have changed

The TCJA has removed employer deductions previously allowed for parking, transit and carpooling. Additionally, employers who offer transportation benefits for employees who are commuters can no longer deduct these reimbursements as “qualified transportation fringe benefit” from their tax return, although qualified bicycle commuting reimbursements are still allowed as business expense deductions through 2025, when the TCJA expires.

  1. International tax considerations

If your small business operates overseas, the TCJA creates new considerations when filing your taxes. It is vital for small business owners to manage their taxes correctly as penalties for incorrect filing can be severe, including anywhere from lofty fees up to a potential closure of your business. Increased IRS audits of small businesses over the past few years requires that business owners be aware of their tax requirements. Please consult with a tax professional to avoid any costly mistakes.