On August 25, the New York State (NYS) Department of Taxation and Finance issued a Technical Memorandum (TSB-M-21(1)C, (1)I) regarding many important details necessary for the implementation of the state’s recently enacted Pass-Through Entity Tax (“PTET”) provisions.
Businesses should be aware of the important points addressed in the Memorandum and summarized below. If you have any questions regarding how your business could benefit from the PTET, please contact Friedman’s State and Local Tax (SALT) team, who is available to assist.
Who May Make The Election
Only an authorized person may make the election on behalf of an eligible partnership or S corporation. For an S corporation, an authorized person includes any officer, manager or shareholder authorized by law or under the entity’s organization documents to make the election. An authorized person for a partnership includes any member, partner, owner, or other individual with authority to bind the entity or sign returns. Pass-through entities should review their organizational documents to determine who is currently able to make the election.
The Election Period
Eligible entities may annually elect to pay PTET for tax years beginning on or after January 1, 2021. The election must be made online on an annual basis and is irrevocable. An electing entity that is a calendar-year taxpayer must use a calendar-year basis to elect, file and pay PTET. An electing entity that is a fiscal-year taxpayer must elect, file and pay PTET for the calendar year in which its fiscal year ends.
For tax years beginning on or after January 1, 2021, an authorized person can make the PTET election through the entity’s NYS Business Online Services account now through October 15, 2021. For tax years beginning on or after January 1, 2022, the annual election may be made online on or after January 1, but no later than March 15.
Electing NYS S Corporations
An electing NYS S corporation calculates its pass-through entity (“PTE”) taxable income by aggregating amounts of income, gain, loss or deduction that flow through for New York income tax purposes to direct shareholders who are taxable under Article 22 (NYS personal income tax). The electing S corporation must then apportion this net amount of taxable income to New York based on the apportionment rules of Article 9-A (NYS franchise tax on general business corporations).
For electing NYS S corporations, each eligible taxpayer’s PTET credit is computed by multiplying the electing entity’s total PTET by the eligible taxpayer’s ownership percentage.
Before computing its PTE taxable income, an electing partnership is required to classify all direct members or partners that are taxable under Article 22 as a resident or nonresident of New York. Members or partners may not be classified as part-year residents for PTET purposes.
For electing partnerships, the electing entity must compute a nonresident PTET credit pool and a resident PTET credit pool prior to computing each eligible taxpayer’s PTET credit. This PTET calculation applies to partners or members who do not have a special allocation of profits that differs from their allocation of losses. If a special allocation is present, an electing partnership must take these allocations into account when computing each pool.
The electing entity must also compute each eligible taxpayer’s profit and loss ownership percentage within that eligible taxpayer’s PTE taxable income pool. To compute an eligible taxpayer’s profit and loss ownership percentage within a pool, the electing entity must determine the ratio of each eligible taxpayer’s profit and loss ownership percentage in the electing entity to the total profit and loss ownership percentages of all eligible taxpayers in the pool. The total of eligible taxpayers’ profit and loss ownership percentages within each pool must equal 100%.
Estimated Tax Payments
An electing entity is not required to make any estimated tax payments for PTET for 2021. For PTET tax years beginning on or after January 1, 2022, an electing entity is required to pay estimated tax for the current taxable year using the online application. Estimated payments are due on or before March 15, June 15, September 15 and December 15 in the calendar year prior to the year in which the due date of the PTET return falls.
Personal income tax estimated payments must be made by or on behalf of partners, members or shareholders as if they were not entitled to the PTET credit (i.e., personal income tax estimated payments will not be reduced because PTET estimated payments were made). Personal income tax estimated payments are not considered prepayment of PTET and may not be applied to PTET liabilities.
For all tax years, PTET estimated payments will only be applied to the PTET liability and cannot be applied to any other taxes. Thus, individual partners, members or shareholders remain subject to making estimated payments under the personal income tax provisions. In addition, payments may not be transferred between related entities or individuals.
Filing The Annual PTET Return
On or before March 15, an electing entity must file an annual PTET return using the online return application to report the information required for the PTET taxable year. All PTET tax returns are filed on a calendar-year basis. A fiscal-year taxpayer must compute its PTE taxable income for the fiscal year that ends within the PTET calendar year. The PTET return for an electing entity within a fiscal year is due on or before March 15 following the close of the calendar year in which its fiscal year ends.
Claiming The PTET Credit
Eligible taxpayers that receive a PTET credit from an electing entity may claim the credit on Form IT-653, Pass-Through Entity Tax Credit, and attach it to their NYS personal income tax return.
Resident Tax Credit
For tax years beginning on or after January 1, 2021, resident partners, members or shareholders will be allowed a resident tax credit against their NYS personal income tax for any pass-through entity tax imposed by another state, local government or the District of Columbia that is substantially similar to the PTET. A list of substantially similar taxes that qualify for the resident tax credit will be posted on NYS’s website.
For tax years beginning prior to January 1, 2021, no such resident tax credit is allowed with respect to substantially similar pass-through entity taxes.