8 Things to Know About New York’s Pass-Through Entity Tax

By Harold Hecht

September 28, 2021

This year, certain New York pass-through entities have a new option to elect to pay state taxes at the entity level that effectively allows a state tax deduction above and beyond the $10,000 limit on state tax itemized deductions.  This election could generate Federal tax savings for the individual owners of the pass-through entity.

The Pass-Through Entity Tax (PTET) is an election that can be made for tax years beginning on or after January 1, 2021. The time to make the election for the 2021 calendar year will expire in just a few weeks, so there is little time to act. To determine if the entity-level tax is right for you, here are a handful of things you need to know.

What is the New York Pass-Through Entity Tax?

The PTET is an optional entity level tax for New York S corporations and partnerships. Typically, S corporation and partnership activity is reported on the entity’s tax return but the earnings and tax liability flow down to the individual owners. The new PTET allows the business to report and pay those taxes directly.

Who can make the election?

Only entities that are taxed as partnerships or S corporations can elect the PTET. Single member LLCs, sole proprietors, trusts, and nonprofits are not eligible.

Though all partners and shareholders should be consulted about this change, any individual who is eligible to sign the tax return can make the election on behalf of the partnership or S corporation.

When is the election deadline?

Calendar-year entities have until October 15, 2021 to make the election for the 2021 tax year. Beginning in 2022, the election deadline shrinks, requiring the election to be made no later than March 15th of the tax year. This means that if your entity wants to elect the PTET on its 2022 tax return, you must file the election by March 15, 2022.

You can make your election online in your entity’s Online Services account.

How do you calculate, report, and pay the PTET?

For S corporations, the entity must first calculate its taxable income allocated to New York, which is the sum of all items of income, deductions, gains, and losses derived from New York sources. The amount of New York earnings taxable to the business should mirror the amount of New York earnings that would have been passed through to the shareholders if no election had been made. The PTET is paid on the aggregate New York source income of all shareholders.

For partnerships and LLCs, the entity must first determine the resident status of each partner/member.  It then calculates its taxable income allocated to New York, which is the sum of all items of income, deductions, gains, and losses derived from New York sources. The amount of New York earnings taxable for the PTET is the aggregate of the total distributive shares of income of all resident partners/members (allocated 100% to New York) plus the New York source income of all nonresident partners/members.

A progressive tax rate is applied to the business’s taxable income.

PTET Taxable Income Tax Rate
$1 – $2,000,000 6.85%
$2,000,001 – $5,000,000 9.65%
$5,000,001 – $25,000,000 10.30%
$25,000,001 + 10.90%

PTET Taxable Income Tax Rate
$1 – $2,000,000 6.85%
$2,000,001 – $5,000,000 9.65%
$5,000,001 – $25,000,000 10.30%
$25,000,001 + 10.90%

As of the date we posted this article, the annual PTET tax form has not yet been released.

Are PTET estimated taxes required?

Yes, beginning in 2022.

Because the PTET was created in 2021, businesses were given a one-year reprieve from paying estimated taxes at the entity level. In 2021, the partners and shareholders are responsible for paying the estimated taxes, and they must do so by March 15, 2022.

However, if your entity so chooses, the entity can make an estimated tax payment to cover the 2021 PTET liability. If the entity makes this optional estimated tax payment, they should do so prior to December 31, 2021 if they want to take a 2021 federal tax deduction for state taxes paid.

In 2022, PTET-electing entities will be required to pay the tax directly, and they must do so in equal installments on or before March 15, June 15, September 15, and December 15 of the tax year.

How will this change your individual income tax return?

In general, individuals whose entities elect the PTET will report lower flow-through business earnings on their federal returns than individuals whose entities do not make the election.

Because PTET-electing entities are paying state taxes directly, they can deduct those costs as business expenses1, and the amount net of state taxes will flow through to the individual owners2. Consider the following comparison of an S corporation that reports $3 million of taxable income.

    SCENARIO 1: SCENARIO 2:
    No PTET Election

(State income tax is paid by the individual owners)

  PTET Election

(State income tax is paid by the entity)

Business Taxable Income $3,000,000 $3,000,000
Less: Deduction for State Taxes
Paid by the Entity
($ 0 ) ($233,500)1
Equals: Business Income Reported on Owners’ Federal Returns $3,000,000   $2,766,5002



This same deduction does not flow through to individuals’ state returns; on their New York state tax returns, individuals must add back that deduction for New York state taxes paid. They will, however, receive a dollar-for-dollar state tax credit for taxes by the entity.

Tell me more about the PTET credit – what is it, and who gets it?

On their New York state tax returns, partners and shareholders will be taxed on their share of the entity’s taxable earnings. Because the business paid the pass-through entity tax on their behalf, they can claim a credit for their share of the tax liability. This credit can be taken on the state tax returns of both New York residents and nonresidents, and if there is any excess credit over taxes owed, it can be refunded.

How does the PTET affect the $10,000 federal SALT limitation?

At the end of 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA). One of the most controversial provisions of this tax law was the $10,000 cap on state and local tax (SALT) deductions. Individuals in high-taxed states easily reached this cap, and any excess deductions were forfeited. This resulted in a significant increase in many individuals’ federal tax liabilities.

The PTET was created to address this problem. By allowing the business to pay the state tax directly, the business could take the state tax deduction.

In other words, the PTET transforms an individual tax deduction (which is capped at $10,000) into a business tax deduction (which faces no limitations).

Have more questions?

The New York PTET is an election, and it’s one you should consider carefully. While the PTET may allow you and your fellow business owners circumvent the $10,000 federal SALT deduction cap, there may be issues that arise. Fortunately, on August 25, 2021, the New York Department of Taxation and Finance released a technical memo about the PTET, which we broke down in more detail here. In this memo, the state addressed some of the following concerns:

  • How New York nonresident owners are affected by this change
  • How estimated taxes should be calculated
  • How the PTET credit is calculated for nonresident owners and corporate owners

Additionally, you’ll need to think about how similar taxes in other states will affect your and your fellow owners’ individual returns. The New York PTET isn’t the only entity-level tax. Other states implementing similar taxes include New Jersey, Connecticut, Maryland, and Georgia just to name a few, and we expect more states to issue similar laws in the future.

To learn more about the New York PTET or any other state’s pass-through entity tax, contact your Mazars advisors today. We’ll be happy to help you figure out if the PTET is the right path forward.

HAROLD HECHT
MANAGING DIRECTOR
+1 646.225.5953
harold.hecht@mazarsusa.com

 



Disclaimer of Liability

The information provided here is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

Mazars USA LLP is an independent member firm of Mazars Group.


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