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.
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.
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.