On April 19, 2021, New York State (“NYS”) Governor Andrew Cuomo signed the 2021-2022 budget bill, which includes the highly anticipated “Pass-Through Entity (PTE) Tax.”
The New York PTE tax follows several other states in availing itself of the IRS’ guidance in Notice 2020-75, which permits the use of PTE tax regimes. Such regimes have been implemented by certain states as a means to circumnavigate the limitation on the deductibility of state and local taxes (the “SALT Cap”), which was enacted as part of the Tax Cuts and Jobs Act (“TCJA”). With the new PTE tax in place, eligible entities that elect to be taxed at the entity level will now be able to provide their owners with a credit equal to such owners’ appropriate share of the tax paid by the PTE, and therefore avoid the $10,000 SALT deduction limitation.
New York Pass-Through Entity Tax Overview
Election, Estimated Payments, and Due Dates
The new PTE tax election is effective for tax years commencing on or after January 1, 2021. Generally, the New York PTE tax is an entity-level election. Eligible entities must make an annual election by the due date of the first estimated payment for the current taxable year (March 15 for calendar year taxpayers).
- For S corporations, the election must be made by any authorized officer, manager or shareholder.
- For partnerships, the election must be made by any member, partner, owner or other individual with authority to bind the entity or sign returns.
For the 2021 tax year, due to the bill passing after March 15, the election must be made no later than October 15, 2021. Once an annual election has been made, it is irrevocable for the given tax year.
For calendar year taxpayers, PTE tax returns are generally due by March 15 of the following year for both partnerships and S corporations. For fiscal year entities, the return will be due March 15 following the close of the calendar year that contains the final day of the entity’s tax return. In addition, once a PTE tax return has been filed, it cannot be amended without authorization by the State Tax Commissioner.
For the 2021 tax year only, no estimated taxes will be required to be made. Beginning with March 15, 2022, estimated tax payments are to be made by March 15, June 15, September 15 and December 15, regardless of whether the entity has a calendar or fiscal year-end.
The New York PTE tax is an elective tax that allows eligible partnerships and New York S corporations to pay an entity-level beginning rate of 6.85 percent of the entity’s New York taxable income, up to $2 million. The PTE tax rate would be progressively applied based on the pass-through entity’s taxable income, as outlined in the table below.
The Pass-Through Entity Tax would be imposed at the following rates:
|Pass-Through Entity Taxable Income||NYS Tax Rates|
|Up to $2 Million||6.85%|
|From $2 Million to $5 Million||9.65%|
|From $5 Million to $25 Million||10.30%|
|Over $25 Million||10.90%|
Credit for PTE Taxes Paid in NYS and Other Jurisdictions
Owners of the electing PTEs will generally be entitled to a credit based on their distributive share of the PTE taxes paid by the entity on their personal income tax returns. Both New York resident and nonresident taxpayers may be entitled to this credit to reduce their New York State individual income tax liability. In the event the credit exceeds the New York tax liability owed, an overpayment credit can be claimed or a refund can be requested. However, a refund request would not include interest on that refund payment.
In addition to the New York PTE tax credit, the legislation includes an amendment to existing law providing that New York individual resident taxpayers who own entities that pay “substantially similar” PTE taxes to other jurisdictions can claim a resident credit for their share of PTE taxes paid to other states.
- The New York State PTE tax should cause a sigh of relief for many individual taxpayer owners of PTEs, especially those living in New York State. While some states impose mandatory PTE taxing regimes, the elective approach taken by New York should allow PTE-owning taxpayers the flexibility to effectively address their differing positions with respect to their pass-through income. It should be noted, however, that the election extends only to New York State income taxes and does not provide any benefit from a New York City income tax perspective, which presently does not follow the same state-level treatment.
- The PTE tax is imposed on the entity. However, each partner or S corporation shareholder would have “joint-and-several” liability for their share of the PTE tax. Owners need to be aware that they would be liable for the PTE taxes that are unpaid by their entities.
- The information included in this alert is a high level summary of the important information contained in New York budget bill number A. 3009-C/S. 2509-C. The PTE tax is complex, and its intricate details are beyond the scope of this alert. Please reach out to the SALT team for assistance in calculating the PTE tax and associated credits.