On August 25, 2021, the New York State Department of Taxation and Finance released guidance (Technical Memorandum, TSB-M-21(1)C, (1)I) addressing the recently enacted optional pass-through entity tax (PTET) that partnerships and New York S corporations may elect to pay for tax years beginning on or after January 1, 2021.
Background
As discussed in a prior Legal Alert, the most recent Budget legislation added the PTET under Article 24-A of New York’s Tax Law. Entities that elect to be subject to the PTET will pay a graduated tax of up to 10.9 percent on their taxable income at the entity level, while their individual partners, members, and shareholders will receive a refundable tax credit equal to the proportionate or pro rata share of taxes paid by the electing entity. The PTET is intended to be revenue neutral and provide a partial work around for the federal SALT cap, i.e., the $10,000 limitation on the deduction of an individual’s state and local income taxes, as enacted in the Tax Cuts and Jobs Act of 2017.
Highlights of the new Department guidance
Making the election
The guidance confirms that an eligible entity must elect to opt into the PTET online on an annual basis, and that such election is irrevocable for the tax year it is made. A link to the online application can be found here. For the 2021 tax year, the election may be made now through October 15, 2021, and for future tax years, the election may be made on or after January 1 but no later than March 15.
Calculating pass-through entity taxable income
The guidance explains that the PTET is imposed on a pass-through entity’s taxable income (PTE taxable income), which generally 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. Thus, for example, PTE taxable income does not include the income that flows through to corporate members of, or partnerships holding an interest in, an electing entity, as they are not subject to New York personal income taxation. A “direct member, partner, or shareholder” is defined as “any member, partner, or shareholder that is issued a federal Schedule K-1 by the electing entity based on the member’s, partner’s, or shareholder’s direct ownership interest in the electing entity.”
Electing partnerships
Electing partnerships calculate PTE taxable income by computing both a “resident PTE taxable income pool” and a “nonresident PTE taxable income tax pool” and adding those amounts together.
The resident PTE taxable income pool is generally all of the partnership’s income that flows through to resident partners, whether that income is from New York sources or sources outside the state. It is determined by aggregating any amounts of income and gain that flow through to resident individual members or partners, offset by any losses or deductions that flow through to those same members or partners. The nonresident PTE taxable income pool, on the other hand, is determined by aggregating only the amounts of income and gain from New York sources that flow through to nonresident individual members or partners, offset by any losses or deductions from New York sources that flow through to those same members or partners.
| Eversheds Sutherland Observation: Consistent with the Budget legislation, this means that the PTET is imposed on income earned by a partnership outside of New York that is distributed to a New York resident. As discussed further below, New York residents will receive a credit equal to the tax calculated on the income they receive. |
Electing S corporations
Electing S corporations calculate PTE taxable income by first aggregating amounts of income, gain, loss, or deduction that flow through for New York income tax purposes to direct members or shareholders who are subject to New York personal income taxation. Unlike electing partnerships, which only apportion amounts flowing through to nonresident owners, an electing S corporation must apportion all net taxable income based on the apportionment rules found in New York’s corporate franchise tax law (see Tax Law § 210-A).
Tax rates
The PTET is imposed on each electing entity’s total PTE taxable income. The guidance provides a table outlining the graduated tax rates, ranging from 6.85% for PTE taxable income of $2 million or less to 10.9% for PTE taxable income greater than $25 million.
| Eversheds Sutherland Observation: The tax brackets are roughly parallel to the New York State personal income tax rates and brackets imposed by the Budget legislation. The actual personal income tax rates applicable to an individual partner/shareholder, however, are not taken into consideration. For example, 30 resident partners with equal ownership interests in an electing partnership that has $30 million in PTE taxable income will not earn enough income from the partnership alone to be subject to New York’s 10.9% marginal tax rate for individuals earning over $25 million. Nevertheless, the partnership’s PTE taxable income will be subject to the 10.9% marginal tax rate. As discussed in more detail below, to the extent a partner’s share of the PTET exceeds their New York personal income tax liability, the partner’s PTET credit is refundable. |
Annual PTET returns
Electing entities must file an annual PTET return on or before March 15 of the following year. All PTET returns are filed on a calendar-year basis, but a fiscal-year taxpayer does not recompute its income on a calendar-year basis—instead, its PTE taxable income must be computed for the fiscal year that ends within the PTET calendar year.
Corresponding tax credits
Electing entities must provide sufficient information on the annual PTET return to identify all PTET credit-eligible taxpayers and their credit amounts—according to the guidance, failure to comply will cause otherwise eligible taxpayers to not be entitled to utilize the PTET credit on their New York personal income tax returns.
PTET credit
Electing partnerships must compute a nonresident PTET credit pool and a resident PTET credit pool prior to computing each eligible taxpayer’s PTET credit. The guidance contains a detailed explanation as to how to calculate each pool—and each eligible taxpayer’s share of the credit calculated in each pool—which is intended to determine each partner’s share of the PTET paid (taking into account that the PTET is calculated based on each resident partner’s share of the partnership’s total income, and each nonresident partner’ share of the partnership’s New York source income).
Electing S corporations—which calculate taxable income subject to the PTET by applying New York apportionment rules regardless of whether there are any New York resident shareholders—compute each eligible taxpayer’s PTET credit by multiplying the electing entity’s total PTET by the eligible taxpayer’s ownership percentage.
“Substantially similar” tax credit
Consistent with the Budget legislation, the guidance confirms that New York resident “partners, members, or shareholders” will be allowed a resident tax credit against their personal income tax liability for any pass-through entity tax imposed by another state, local government, or the District of Columbia, that is “substantially similar to the PTET.” The guidance does not indicate what constitutes a “substantially similar” tax, but instead states a list of substantially similar taxes will be posted on the Department’s website.
Claiming the PTET credit
Eligible taxpayers must claim their PTET credit on Form IT-653, Pass-Through Entity Tax Credit, and attach the form to their individual New York State personal income tax return. The PTET credit may not be claimed on group returns filed for nonresident partners (i.e., Form IT-203-GR) or nonresident shareholders of S corporations (i.e., Form IT-203-S).
Estimated PTET payments
For 2021, estimated PTET payments are optional, and may be made prior to December 31, 2021. For taxpayers wishing to make estimated payments in 2021, an online estimated tax application will be made available by December 15, 2021. Note, however, that in 2021 personal income tax estimated payments must be made by or on behalf of partners, members, or shareholders under Article 22 calculated as if they were not entitled to the PTET credit.
| Eversheds Sutherland Observation: Entities electing to be subject to the PTET in 2021 will want to consider whether the benefit of making estimated payments in 2021 (which should allow an individual partner/shareholder to get the federal tax benefit of the PTET in 2021) outweighs the cost of temporary double taxation caused by the inability to take the PTET credit into account when determining 2021 personal income tax estimated payments. |
For subsequent years, estimated payments must be made on a quarterly basis (due on March 15, June 15, September 15, and December 15 respectively). Each payment should be equal to 25% of the required annual payment for the taxable year, which is the lesser of: (1) 90% of the PTET required to be shown on the return of the electing entity for the taxable year; or (2) 100% of the PTET shown on the return of the electing entity for the preceding taxable year.
Taxpayers with PTET credits exceeding the taxpayer’s tax due for the year may get the excess credit refunded.
[View source.]
