On April 19, 2021, through the enactment of the 2021-2022 Budget Bill, New York State created new Article 24-A of N.Y. Tax Law, which establishes a new elective Pass-Through Entity Tax (PTET) that applies to partnerships, LLCs (taxed as partnerships), and S corporations. New York’s enactment of the PTET represents a workaround to the $10,000 SALT limitation enacted as part of the federal Tax Cuts and Jobs Act in 2017. The PTET is an entity level tax which reduces the pass-through taxable income to owners of partnerships and S corporation.
Imposition of Tax on Entity
If elected, the PTET is an entity level tax assessed on partnerships and S-Corporations and is imposed on the share of income or loss that is attributable to eligible owners - including individuals, estates, and trusts that are not taxed as corporate entities. The PTET is calculated on an aggregate basis, meaning all New York Source income attributable to eligible owners is subject to the tax, regardless of residency status of the partner or shareholder.
Irrevocable Election
The applicable entity makes the election to have the PTET apply. The election is made annually and is irrevocable for that tax year. The election is made by March 15 of the applicable tax year. For the 2021 tax year, the PTET election must be made by October 15, 2021.
What’s the Benefit?
The applicable electing pass-through entity will pay the tax which will be deducted in determining the pass-through entity’s taxable income. This reduced pass-through income will reduce the federal income taxes on the pass-through entity’s income to the owners. For New York State purposes, the PTET is then claimed as a credit on the New York individual income tax return of the partner or shareholder. If the credit exceeds the New York individual income tax for the year, the excess can be refunded or credited without interest. As noted above, the PTET is deductible for federal income tax purposes.
Tax Rates
The PTET is imposed is at graduated rates as follows:
|
PTE Income |
Rate |
|
Not over $2 million |
6.85% |
|
$2 million but not over $5 million |
$137,000 plus 9.65% (over $2 million) |
|
$5 Million but not over $25 million |
$426,500 plus 10.30% (over $ 5 million) |
|
Over $25 Million |
$2,486,500 plus 10.90% (over $25 million) |
Procedural Matters and Due Dates
As of this writing, New York State has yet to release a form to make the PTET election, but the election must be made no later than October 15 for the 2021 tax year. For partnerships, the election must be made by an individual, partner, or member who has the ability to bind the partnership. For S corporations, the election is made by a corporate officer, shareholder, or authorized manager.
PTET returns are due by March 15, and payment of the PTET is due March 15 regardless of the entity’s tax year Amended returns are not permissible unless permission is granted by the Commissioner of NYS Tax and Finance.
Extensions can be filed to extend the time to file the PTET return by 6 months. There is no extension of time to pay the PTET.
Estimated PTET Payments
For years beginning after 2021, estimated payments of the PTET are required to be made on or before the fifteenth day of March, June, September, and December. January estimate payments are not permitted. For purposes of making estimated PTET payments, there is a safe harbor method of basing the PTET on 90% of prior year tax or 100% of current year tax.
More to Come
New York State has yet to release forms for making the PTET election or estimated tax payment vouchers. As more information becomes available, we will add further discussion of the new PTET regime, including how an entity’s method of accounting (cash or accrual basis) will impact the timing of the deductibility of the PTET at the entity level.
