New York’s Passthrough Entity Tax

• September 30, 2021
• Carey M. Heyman, CPA

Back in April, New York enacted an annual, irrevocable elective passthrough entity tax (PTET) effective for tax years beginning on or after January 1, 2021.  The optional tax is New York’s version of the State and Local Tax (SALT) cap workaround.  An eligible S corporation or partnership subject to tax under Article 22 of the state’s tax law may be eligible for a PTET credit on their New York State income.  Taxpayers must make the annual PTET election by March 15 of the tax year; however, for 2021, the election is due by October 15, 2021.  The passthrough entity would generally need to pay its PTET liability during the calendar year 2021 in order to qualify for the federal SALT cap workaround and be eligible to be deducted on the 2021 federal return of the passthrough entity.

The PTET is imposed upon the taxable income of an electing entity.  Taxable income includes all income, gain, loss, or deduction of an electing entity that flows through to a direct partner, member, or shareholder for New York personal income tax purposes. An electing New York S corporation calculates its passthrough entity taxable income by aggregating amounts of income, gain, loss or deduction that flow through for New York income tax purposes to direct members or shareholders who are taxable under Article 22. An electing partnership’s calculation of its PTE taxable income is separated into two components:

• For New York resident Article 22 partners, the taxable income is composed of all the items of income, gain, loss or deduction allocable to the resident partners.
• For New York non-resident Article 22 partners, the taxable income is composed of New York source (apportioned) income, gain, loss or deduction (for example, New York sourced income) allocable to the non-resident partners.

For each tax year beginning on or after January 1, 2021, the PTET is calculated at 6.85% of passthrough entity taxable income up to $2,000,000, with excess taxable income imposed at graduated rates up to 10.90%.

In August, the New York State Department of Taxation and Finance issued additional guidance on the PTET.  Highlights of the additional guidance include:

• Only an authorized person, as defined, may make this election on behalf of an eligible S corporation or partnership.
• The PTET election application can be filed electronically by creating a business online services account with the New York State Department of Taxation and Finance.
• Electing entities are not required to make estimated tax payments for the PTET in 2021, but may do so prior to December 31, 2021.  A form will be available to do so by December 15, 2021.
• Eligible taxpayers that receive a PTET credit from an electing entity may claim the credit on Form IT-653, Passthrough Entity Tax Credit, and attach it to their New York income tax return.
• A partnership must not include in its passthrough entity taxable income any amounts of income, gain, loss, or deduction that flow through to a direct partner that is a partnership or an entity not subject to tax under Article 22, even if the income is ultimately taxable to a partner under Article 22 through tiered partnerships.

Thanks to CLA’s SALT team, specifically Ellen McCabe and Tony Switajewski, for their help with this blog post!

Source: New York State Department of Taxation and Finance, Bloomberg Tax

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