The New York State Department of Taxation and Finance has issued guidance on the recently enacted New York Pass-Through Entity Tax. Technical Memorandum, “Pass-Through Entity Tax,” TSB-M-21(1)C, (1)I (N.Y.S. Dep’t of Taxation & Fin., Aug. 25, 2021). We previously summarized the key aspects of the Pass-Through Entity Tax in our client alert, New York State Enacts Pass-Through Entity Tax as SALT Limitation Workaround (April 22, 2021).
Effective for tax years beginning on or after January 1, 2021, the New York Pass-Through Entity (“PTE”) Tax is an elective tax that allows eligible partnerships (including LLCs taxable as partnerships) and New York S corporations to elect to be subject to the new tax, at rates equivalent to the current New York State personal income tax rates (6.85 percent of pass-through entity taxable income of up to two million dollars, with excess income taxed at graduated rates up 10.90 percent). By making the annual election, a qualifying pass-through entity will afford its owners a legal means to fully deduct their New York State income taxes and avoid the $10,000 federal limitation on state and local tax deductions. Direct partners, members, or shareholders will be entitled to a tax credit for their shares of the PTE tax paid that can be applied against their New York State income tax liabilities.
The newly-released guidance addresses a broad range of issues, including the following:
As noted above, the PTE tax election for 2021 must be made no later than October 15, 2021, and once made it is irrevocable for the year. The Department intends to provide additional guidance on its website as it becomes available. We will continue to monitor those developments.