NY PTET Update: Treatment of Guaranteed Payments

Hodgson Russ LLP

Hodgson Russ LLP

As promised, we have an update on one of the unanswered questions relating to New York’s Pass-Through Entity Tax (PTET) that went into effect last year. While we are still waiting for an official pronouncement, we have heard from other practitioners that the Department is taking a favorable position on the treatment of guaranteed payments in the context of the PTET.

Previously we raised the question of how the Department would treat guaranteed payments in the context of income partners who have no capital accounts and receive none of the partnership’s net profits. Based on a Tax Appeals Tribunal decision, Matter of Tosti, (TAT 05/12/2011), we suggested that the Department should treat these income partners receiving guaranteed payments that are reported on a Schedule K-1 as partners for purposes of the PTET. We thought that 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.

In response to a practitioner question submitted at the Department’s website specifically set up to answer PTET questions (https://tax.custhelp.com/app/ask/c/519), the Department has recently confirmed our analysis, explaining that for purposes of the PTET, guaranteed payments received by “direct partners” must be taken into account in computing the resident and nonresident pools. And according to the Department, a “direct partner” includes a partner who receives a Schedule K-1 only reporting a guaranteed payment. Capital account ownership is not required. In addition, the Department confirmed that the PTET credit should be allocated based on the partner’s income included in the PTET taxable income (which would include the guaranteed payment).

We applaud the Department for offering this Q&A service for the PTET and for the quick responses they have been providing. Stay tuned as we will keep providing updates as the Department continues to iron out the wrinkles in the PTET in 2022.

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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