The 2021-22 New York State budget legislation includes a Passthrough Entity (PTE) tax as a workaround for the $10,000 state and local tax (SALT) cap, which was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), to limit the amount of state and local tax an individual could deduct on their federal income tax returns each year. In response, NY and several other states filed law suits and attempted to create workarounds for their taxpayers, however none of these have been successful. On November 9, 2020 the IRS issued Notice 2020-75, which provides for amounts paid by a partnership or S Corporation to a state to satisfy their income tax liability, to be deductible by these entities when calculating their federal taxable income. Furthermore, these payments will not be counted toward the SALT cap of partners or shareholders when preparing their individual federal income tax returns.
New York’s PTE tax is elective for partnerships, limited liability companies and S corporations. It is effective for tax years beginning on or after January 1, 2021, however an election must be made at the entity level no later than October 15, 2021 for the entity to participate this year. After 2021, the election is an annual election that must be made by March 15th of each year going forward. Once the election is made, it is irrevocable for that tax year.
The advantages to making the election are:
- NY State income taxes paid at the entity level will be fully deductible by the entity and will reduce federal taxable income that flows through to the shareholders, partners or members.
- Owners of a PTE will receive a credit for NY tax paid at the entity level that can be used on their NY personal income tax return.
The NY tax rates that will be applied to the PTE’s taxable income are as follows:
- 6.85% for taxable income less than $2,000,000.
- $137,000 plus 9.65% of the excess PTE taxable income over $2,000,000.
- $426,500 plus 10.3% of the excess PTE taxable income over $5,000,000.
- $2,486,500 plus 10.9% of the excess PTE taxable income over $25,000,000.
Electing PTE’s will make quarterly estimated tax payments on March 15, June 15, September 15 and December 15 each year. For 2021, estimated tax payments will not be required and a tax payment will be required on March 15, 2022. Cash basis PTE’s will need to make their tax payments by December 31, 2021 to be deductible this year.
Partners, shareholders or members of an electing PTE will be entitled to a credit against their NY personal income tax equal to their direct share of the PTE tax. The amount of credit claimed will need to be added back to the partners, shareholders or members federal adjusted gross income when computing their NY taxable income.
PTE’s considering making the election for 2021 have limited time to act. Before making the election, each PTE should prepare an analysis to determine if electing to pay the Passthrough Entity Tax is beneficial to their owners.
Please contact your Tronconi Segarra & Associates tax advisor if you have any questions on NY’s new Passthrough Entity Tax.
Authored by: Andrew J. Toth, CPA, Partner