In direct response to the $10,000 cap on the state and local tax deduction added by the Tax Cuts and Jobs Act in 2017, many states have enacted laws to allow pass-through entities (PTE) an election to pay income tax at the entity level rather than the individual owner level. The election is meant as a “workaround” to the $10,000 cap. Notice 2020-75, issued by the Internal Revenue Service in November 2020, appears to endorse these workarounds. New York is one of many states to enact this regime.
Election for 2021 tax year: Due Oct. 15, 2021
Beginning Jan. 1, 2021, New York’s pass-through entity tax (PTET) will allow partnerships, except publicly traded partnerships, and entities that are treated as S corporations for New York purposes an annual election to pay income tax on behalf of its owners. The election is generally required by March 15 of the tax year to which the election would apply. However, the election must be made by October 15 for tax year 2021.
Taxpayer considerations for evaluating and determining whether the PTE is beneficial include, but aren’t limited to, the following:
- PTET is an annual and irrevocable election.
- The election must be made online by a PTE officer authorized to make the election.
- Owners of entities that make the election are required to file an individual tax return in New York to claim the corresponding credit. The credit will not be allowed on a group composite return.
- New York nonresident owners need to consider the impact to their resident state filings (e.g., ability to receive a credit for taxes paid under the PTE regime).
- For S corporations wishing to utilize the PTET, ensure proper New York S election is on file.
- Determine possible cash flow and distribution implications.
- Estimated payments aren’t required for tax year 2021 but will be required for tax year 2022 and beyond.
Beginning in 2022, New York City taxpayers can now opt-in to the NYC PTET. For a more detailed explanation of the PTET, we recommend reviewing the examples provided in New York Technical Memorandum TSB-M-21(C), (1)I.
Plante Moran’s state and local tax specialists have experience with New York’s PTE, as well as the PTE regime in other states, and can assist businesses with determining the impact of a PTE. Please contact Plante Moran’s state and local tax team to see if your business can benefit from the New York PTET election.
