Important Updates for New York’s Pass-Through Entity Tax

Hodgson Russ LLP

Hodgson Russ LLP

Important Updates for New York’s Pass-Through Entity Tax

We have been trying to keep up with all of the questions from clients and practitioners regarding New York’s Pass-Through Entity Tax (PTET) with the deadline for making the 2021 annual election looming on October 15. We published a handy list of FAQs in State Tax Notes, covering the nuts and bolts of the PTET, state credits and the federal deduction. We followed up with our blog post here after NYS published some PTET guidance in late August. But, of course, new questions keep arising. 

Based on discussions internally, with other SALT practitioners, and with NYS representatives who were actively involved in the PTET legislation and guidance, we wanted to add a few more FAQs to our list.

My corporation is a mandatory S corporation pursuant to Tax Law §660(i). I’ve gone online to make the PTET election and it says I haven’t made the S election. What gives?

You must affirmatively make the S election for 2021 by filing Form CT-6 in order to make the PTET election. That’s because the requirement to be treated as a NY S corporation under Tax Law §660(i) due to the percentage of investment income received by corporation is determined at the close of the year, whereas the PTET election is before the end of the year. Thus, whether or not the S election is mandatory for 2021 is unknown on October 15, 2021 so the form must be filed. Fax the CT-6 Form in this week (518-435-8605) and then call to follow up, to be sure that it will be processed in time to make the PTET election!

I am a part-year NY resident but for PTET purposes, I am treated as a full-year resident, so that my entire distributive share is includable in PTET taxable income. When I file my part-year resident PIT return, will I get the full benefit of the credit?

Yes! TSB-M-21(1)C, (1)I states that if an individual is a NY resident for more than half the year, he or she will be treated as a full year resident for PTET purposes. If they are resident for less than half the year, they will be treated as a nonresident for PTET purposes. The difference is whether that partner’s share of non-NY sourced income and unsourced income (like interest, dividends, and capital gains), is included in the PTET tax base. Let’s say an individual moves out of NY on October 1. Their entire distributable share is included in the PTET base. But when they file their part-year NY resident return, all of the income attributable to their resident period will be included in taxable income, but only NY-sourced income form the nonresident period will be included. Nevertheless, they will get the full benefit of the PTET taxes paid on their behalf - calculated as if they were full-year residents - as a credit against their NY tax, likely resulting in a bigger refund.

My partnership pays out guaranteed payments to partners that are not based on the partner’s ownership percentage. How do I calculate the credit amount?

The methodology for calculating the credit in the above-mentioned TSB-M only applies if a partnership does not use a special allocation. If the partnership pays out guaranteed payments to partners and those payments do not correspond with the partner’s capital interest or share of profits and loss, the calculation of the credit should be based on the partner’s share of the PTET. In other words, if a partner owns 10% of the partnership, the partnership has $10,000 of net profits that are all NY source, and also pays only this partner $10,000 in a guaranteed payment, she should receive 55% of the total PTET tax as a credit. [($1,000 + $10,000) / ($10,000 + $10,000)].

If the partnership has income partners who have no capital account and receive none of the partnership’s net profits, would those individuals be treated as partners or employees for purposes of including their guaranteed payments in the PTE taxable base?

New York has provided no guidance on this issue as it relates to the PTET. But the Tax Appeals Tribunal has previously held that a nominal “partner” was a partner for New York income tax purposes where the partner: (1) didn’t receive a share of the partnership’s income or loss; (2) didn’t have a capital account; and (3) received only a guaranteed payment reported to him on a Schedule K-1. Matter of Tosti, (TAT 05/12/2011). We don’t think New York would take a different approach for PTET purposes. So “income partners” resembling the Tosti profile should be treated as partners, the guaranteed payments they receive should be included in calculating the partnership’s PTET, and the income partners should be entitled to a credit for their share of the PTET. However, there is going to be a disconnect between the PTET benefit received by the income partners, and the economic burden of the benefit which - absent an adjustment to the guaranteed payments to the income partners - will be borne entirely by the partners with equity.

I know I’m supposed to pay in 100% estimated taxes as if my entity did not make a PTET election, but if I don’t fully pay-in my estimates with the expectation of having to pay some estimated tax penalties, would I be able to get the automatic six month extension for filing my 2021 taxes?

Sorry to ask a question that we don’t know the answer to … but we don’t know. We’ll be asking the tax department for more guidance on this and will update folks before April 15, 2022!

We will follow up with additional information and guidance as we receive it.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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