New York Pass-Through Entity Tax
By Joshua Stein, Senior Manager, Tax & Business Services, Barry Halpern, Partner, Tax & Business Services & Lisa Haime, Senior Manager, Tax & Business Services
The New York State Department of Taxation and Finance has issued additional guidance on the elective Pass-Through Entity Tax (PTET) available to eligible partnerships and S corporations for taxable years beginning on or after January 1, 2021.
The Department added a web page for the PTET, which provides information and updates as well as a technical services memo, TSB-M-21(1)C, 08/25/2021, with guidance and examples.
Below is a summary of the guidance.
For additional information, click here.
- Election process – The election can only be made via the entity’s New York State Tax Department Business Online Services account. If the entity does not have a Business Online Services account, the authorized person will need to create one. The website specifically states that a tax professional may not make this election on behalf of an entity.
- Timing of election – Generally, the irrevocable annual election must be made by the due date of the first estimated quarterly payment (March 15). An electing entity that is a fiscal-year taxpayer must elect, file, and pay the PTET for the calendar year in which its fiscal year ends. For 2021, however, the election must be made by October 15, 2021.
- Estimated tax payments – For tax years after 2021, estimated tax payments must be paid in four equal installments and are due by the 15th of March, June, September and December for both calendar-year and fiscal-year filers.
- Pass-through entities will not be required to make estimated payments for 2021. However, an entity may choose to make optional online estimated tax payments prior to December 31, 2021. This will allow certain taxpayers to receive the federal tax benefit in 2021. An online estimated tax application for PTET will be available by December 15, 2021.
- Personal income tax estimated payments for 2021 must still be made by or on behalf of partners, members, or shareholders under Article 22, calculated as if they were not entitled to the PTET credit.
- Personal income tax estimated payments are not considered prepayment of PTET and may not be applied to PTET liabilities. PTET estimated payments will only be applied to the PTET liability.
- An electing partnership must classify its partners as residents or nonresidents of New York before computing the pass-through entity’s taxable income. The PTET income pool for nonresidents should include only New York-sourced income. The PTET income pool for residents should include all sources of income.
- Members or partners may not be classified as part-year residents.
- A member or partner should be treated as a resident if they are a resident for New York personal income tax purposes for at least half of the year. All other members or partners should be treated as nonresidents.
- If a member or partner is a trust, the electing partnership must classify the trust as a resident or nonresident of New York State based on the residency status of the trust and not of the beneficiaries.
- An electing S corporation’s taxable income pool for the PTET includes only New York-sourced income. The electing S corporation must apportion its net taxable income to New York (single sales factor, market-based sourcing for service revenue).
- To determine taxable income, aggregated income and gain is reduced by losses or deductions without regard to any limitations (e.g., capital losses, passive activity losses and basis limitations) that would be imposed on the partner’s, member’s or shareholder’s federal and New York State personal income tax returns. Taxable income of a partner includes guaranteed payments since such payments are also subject to New York State personal income tax.
- Claiming the PTET credit:
- For electing 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.
- For electing partnerships, a resident and a nonresident PTET credit pool must be calculated before determining each eligible taxpayer’s PTET credit. If a PTE taxable income pool is zero or less, eligible members of that pool (either resident or non-resident) do not get a PTET credit.
- If both of the electing entity’s PTE taxable income pools are zero or less, the eligible taxpayers are not entitled to PTET credits. Instead, the electing entity may file an annual PTET return to request a refund of any PTET estimated tax payments made.
- A trust, other than a trust that is disregarded for tax purposes, is allowed a PTET credit on its fiduciary income tax return, but it is not permitted to distribute any PTET credit it receives to its beneficiaries.
- Eligible taxpayers may claim the credit on Form IT-653, Pass-Through Entity Tax Credit, and attach it to their New York State personal income tax return.
- The PTET credit may not be claimed on group returns filed for nonresident partners on Form IT-203-GR or group returns filed for nonresident shareholders of New York S Corporations on Form IT-203-S.
- An eligible taxpayer claiming the PTET credit must make an additional modification to federal adjusted gross income or federal taxable income on the eligible taxpayer’s New York State income tax return, for an amount equal to the amount of the PTET credit claimed.
- For a partner, member or shareholder to receive the PTET credit, the eligible pass-through entity must supply sufficient information on its tax return to identify all eligible taxpayers and their credit amounts.
- The PTET, once filed, may not be amended unless the Commissioner consents or authorizes the amendment.
- A resident individual will also be permitted a credit against any tax due, equal to the share of any PTET imposed by other states (political subdivision or DC), so long as it is substantially similar to the PTET imposed by New York State and imposes an individual income tax.
- A list of substantially similar taxes that qualify for the resident tax credit will be posted on the Department’s website.
- Resident credit is not allowed for PTET paid prior to 2021.
An analysis should be done for eligible entities prior to making the PTET election in New York, as well as in other states, to determine whether it will be beneficial to make the election.
For additional information regarding how this election may affect you, please contact your Marcum State and Local Tax professional.