For shareholders and partners of New York’s S corporations and partnerships, the new pass-through entity tax (PTET) regime is providing a valuable workaround to the $10,000 federal cap on state and local tax deductions. Here is what you need to know to make the election and secure tax savings for you and your pass-through entity.
Electing the Pass-through Entity Tax Rate
Effective for tax years beginning on or after January 1, 2021, any partnership with a New York State filing requirement or any New York State S corporation can elect to be taxed at a new PTET rate.
For tax year 2021, this election must be made by October 15, 2021 through the entity’s NYS Business Online Services account. Election for tax years beginning on or after January 1, 2022 can be made online between January 1 and March 15 of the tax year in which the election is made.
The graduated PTET rates are determined by the entity’s taxable income, as follows:
- Up to $2,000,000 – 6.85%
- $2,000,001 to $5,000,000 – 9.65%
- $5,000,001 to $25,000,000 – 10.3%
- Greater than $25,000,000 – 10.9%
Calculating PTET taxable income differs by entity type. For S corporations, the calculation is: aggregate income, gain, loss and deduction multiplied by the New York State Allocation Rate.
For partnerships, a pooled method is used to separate income that is earned by New York State residents and non-residents. Residents are treated as 100% allocation to New York while non-residents receive a share of the credit based on their pro-rated state apportionment.
Individual PTET Credit
Eligible taxpayers can claim the PTET credit on Form IT-653, Pass-Through Entity Tax Credit, which is attached to their NYS individual income tax return. If the taxpayer receives multiple PTET allocations, the credits should be aggregated on the taxpayer’s individual income tax return.
If the credit amount exceeds the taxpayer’s tax due for the year, the excess is an overpayment and will either be credited against the taxpayer’s following year’s estimated income tax liability or refunded without interest.
PTET Returns and Estimated Tax Payments
PTET tax returns are due on March 15 of the following year for which the election applies. The returns are prepared and filed on a calendar-year basis. Fiscal-year taxpayers should compute PTE taxable income for the fiscal year that ends within the PTET calendar year.
For the 2021 tax year, an electing entity is not required to make estimated PTET payments but may choose to do so prior to December 31, 2021. However, any personal income tax estimated payments must be made by shareholders as if they were not entitled to the PTET credit.
Making a 2021 estimated tax payment by December 31, 2021 is beneficial for cash basis taxpayers. The PTET estimated tax payment application will be available by December 15, 2021 for entities that have opted into PTET and wish to make payments for the 2021 taxable year.
For tax years beginning on or after January 1, 2022, electing entities are required to pay estimated tax on the amount of PTET calculated based on current taxable year. Each quarterly payment should equal at least 25% of the annual payment, which is the lesser of:
- 90% of the PTET required to be shown on the entity’s return; or
- 100% of the PTET shown on the return of the electing entity for the preceding PTET taxable year
NYS Resident Tax Credit
Also effective for tax years beginning on or after January 1, 2021, resident partners, members or shareholders can also receive a resident tax credit against NYS individual or similar tax imposed by another jurisdiction. S corporations must be treated as a New York S corporation to receive this credit.