New York State legislators passed the State’s 2021-2022 budget and Governor Andrew Cuomo signed the Budget Act into law on April 19, 2021. Article 24-A of this Act relates to the newly created and highly anticipated New York Pass-through Entity (PTE) tax. This is an elective tax designed to benefit “owners” of eligible pass-through entities by providing a workaround for the $10,000 state and local tax (SALT) cap on the federal deduction for individual filers that was enacted under the Tax Cuts and Jobs Act of 2017 (TCJA). Eligible entities include partnerships, limited liability companies treated as partnerships for federal income tax purposes, and New York S corporations. The TCJA limited the itemized SALT deduction to $10,000, which put individual taxpayers in high income tax and property tax states at a significant disadvantage.
In November 2020, Notice 2020-75 was released indicating that the Internal Revenue Service (IRS) will allow a federal deduction for such entity level taxes paid and that the IRS intends to provide forthcoming regulations. The notice also revealed that partners and shareholders can deduct their distributive share of either mandatory or elective state and local taxes assessed at the entity level on their federal income tax return without being subject to the $10,000 limitation.
At this time, a number of states have enacted entity level income taxes as a workaround for eligible taxpayers. Connecticut has done so on all Connecticut sourced income, and their legislation—effective as of January 1, 2018—is NOT elective. New Jersey enacted pass-through Business Alternative Income Tax (BAIT), which is effective for tax years beginning 2020. The entity level tax in both New York and New Jersey is an elective tax. Additionally, Alabama, Arkansas, Louisiana, Maryland, Oklahoma, Rhode Island, and Wisconsin have recently enacted such entity level taxes. Other states, such as California and
Massachusetts have similar bills pending.
Key Provisions of the New York PTE Tax:
- The elective New York PTE tax is effective for tax years beginning after December 31, 2020.
- The PTE tax is deducted from each partner or shareholder’s distributive net income on their Schedule K-1 for federal income tax purposes and is added back to New York income. New York will then generally credit the distributive share of PTE tax to the taxpayer on their individual income tax return and any overpayment may be claimed as a credit or a refund may be requested.
- Overpayments of PTE tax do not earn interest.
- The PTE tax rates are graduated and begin at 6.85% for New York State PTE taxable income up to$2 million and increase to a maximum of 10.9% for PTE income over $25 million.
- The PTE taxable income for resident partners is based on all allocable entity income subject to NYS income tax for the partner or member. For nonresident partners or members, the PTE tax is paid by the entity on their allocable New York source amounts. For S corporations, PTE taxable income is based on all income from New York sources for both residents and nonresidents.
- The PTE tax is NOT applicable to New York City tax.
- To benefit from the PTE tax, eligible entities must generally make an annual election by the due date of the first estimated tax payment for the current year, which is March 15. However, for tax year 2021 only, the election due date will be October 15 and no estimated tax payments are required by the entity. To avoid NYS estimated tax penalties, individual taxpayers must make certain to pay their personal 2021 tax estimates, if required.
- Once made, the annual PTE tax election is irrevocable for the given tax year.
- An authorized officer, manager or shareholder may make the election on behalf of an S corporation. The election may be made for a partnership by a member, partner, owner, or other person with the authority to bind the entity or sign tax returns.
- While the PTE tax is imposed on the entity, it is important to note that each partner, member, or S corporation shareholder will have joint-and-several liability for their share of the PTE tax.
- Beginning in 2022, quarterly estimated tax payments are due on March 15, June 15, September 15, and December 15 for all electing entities. The estimates required are the lesser of 90% of the actual tax owed or 100% of the entity’s tax owed for the prior year.
- The due date of the PTE tax return is March 15 of the following year for calendar year filers. Entities on a fiscal year have a PTE tax return due date of March 15 following the end of the calendar year that includes that final day of the entity’s fiscal tax year.
- Extensions up to six months may be granted by the New York State Commission of Taxation.
- PTE returns may only be amended with the authorization of the State Tax Commissioner.
- New York residents and nonresident taxpayers may be entitled to apply their share of the PTE tax credit against their New York State Individual income tax liability due. They may also claim multiple credits for all pass-through entities that have elected to pay the NYS PTE tax.
- No credit will be allowed unless the electing entity paid the tax imposed under Article 24-A and provided sufficient information on the entity’s tax return so that the Commissioner may identify the taxpayer(s). This information should include, but is not limited to, the Social Security Number or Taxpayer Identification number of the taxpayer who will be claiming the credit.
- New York will also allow resident taxpayers to claim a credit for “substantially similar” PTE taxes imposed by (paid to) other states. With varying pass-through entity tax structures in place in different states, it will be interesting to see what will qualify as being substantially similar.
The tax implications of making a PTE election can be complex and pass-through entities should seek the guidance of their trusted tax professional(s) to review and analyze their specific situation prior to making a PTE election in their state. This analysis should take into consideration various factors, such as the potential impact on nonresident owners whose resident state may not provide a tax credit for their share of PTE tax paid by the entity or in which the costs of administering the PTE tax may outweigh the tax benefit. Our Prager Metis tax professionals are available to assist you with your PTE and other tax and accounting needs.