New York pass-through entity tax

Pass-through entity tax 101

Since the Tax Cuts and Jobs Act of 2017 (TCJA) limited an individual’s state and local tax (SALT) deduction to $10,000, states have been exploring pass-through entity tax workarounds in response. Fast forward to November 2020 when the IRS gave guidance to allow state tax deductions at the pass-through entity level and opened the floodgates to states enacting pass-through entity taxes in the ensuing months, with New York being one of the latest.

As straightforward as it sounds, it really is far from it. Because every state has different regulations, not every pass-through entity will benefit the same.

Pass-through entity taxes permit the pass-through entity to pay the state tax at the entity level, and as the $10,000 SALT cap applies to individuals, the pass-through entity taxes are taken as a partnership or S corporation deduction, which flows through to the partners without limitation. The partners, members or shareholders of the pass-through entity that has paid the state pass-through entity tax either receive a credit against their state individual income tax liability or deduct their distributive share of income from their adjusted gross income in determining their state income tax liability.

New York’s pass-through entity tax deadline is Oct. 15

New York’s version of the tax

New York’s pass-through entity tax (PTET) is for eligible partnerships, including limited liability companies, and S corporations to make an annual, optional and irrevocable election to pay tax on certain income for tax years beginning on or after Jan. 1, 2021. For the 2021 tax year, an entity must make the election through the state’s business online services account portal by Oct. 15, 2021.

The final day for deciding whether to make the irrevocable election for the 2022 tax year is March 15, 2022.

Before a pass-through entity decides to make the election, it should take into consideration how the calculation of PTET taxable income differs between electing New York S corporations and electing partnerships. The pass-through entity should work with its accountant to determine what its taxable income would be as well as its corresponding liability for federal and state tax and credit for taxes paid.

Even though a pass-through entity would expect a federal tax benefit by making the election, it is possible an individual will lose some of their tax credits for taxes paid to other jurisdictions. The risk of losing the credit should be considered prior to making a pass-through entity tax election.

If the pass-through entity decides to move forward, an authorized person, as defined by New York statutes, makes the election, which is binding on all partners, members or shareholders of the pass-through entity.

For tax year 2021, electing entities are not required to make estimated tax payments. However, partners, members and shareholders of electing pass-through entities must continue to make estimated tax payments as if they were not entitled to the PTET credit.

Eligible taxpayers must file an individual personal income tax return to claim the PTET credit. The PTET credit may not be claimed on a group return (composite return) for nonresident partners and shareholders. Individual, trust or estate partners and shareholders will be able to take a credit equal to 100% of the New York PTET paid on their behalf by the pass-through entity. A taxpayer may not claim a PTET credit unless the electing partnership or S corporation paid the tax and the pass-through entity supplies sufficient information on its tax return to identify the taxpayer who will claim the credit. Any overpayment in New York PTET will be credited or refunded to the individual without interest.

In whatever way the pass-through entity is affected by the PTET, the mechanics of claiming the credit for taxes paid is fraught with risk and uncertainty. For example, it still hasn’t been resolved whether individual and/or composite returns are required or allowed or what happens to an entity’s net operating losses. Careful analysis of the taxpayer’s overall tax attributes and state law nuances is required to understand the full impact to both federal and state taxes.

We encourage you to connect with your Baker Tilly tax advisor regarding how this may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Donna Scaffidi
Partner, CPA

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