New York’s PTET Benefits Partnerships and S Corporations
Business owners in New York may now begin to take advantages of tax benefits previously enacted in Connecticut and New Jersey. Passed in New York in September 2021, the Pass-Through Entity Tax (PTET) follows Connecticut’s first workaround in 2018 to federal limitations created by the “SALT Cap” IRS changes made after the 2017 Tax Cuts and Jobs Act. New Jersey and several other states enacted similar laws in 2019. More than 20 states have now passed or proposed similar provisions.States have sought to enact PTETs in response to the state-and-local tax deduction limitation for federal income taxes, which was enacted as part of the 2017 act. As part of that act, the federal Internal Revenue Code was changed for tax years beginning in 2018 in a way that limited an individual’s itemized deduction for state and local income and property taxes to $10,000 ($5,000 if filing separately). For individual taxpayers in higher-tax states like New York, Connecticut and New Jersey this “SALT Cap” acted as a de facto federal tax increase. These taxpayers could no longer claim itemized deductions for the state and local income and property taxes in excess of the $10,000 limit, whereas before 2018 there was no limitation under the regular tax system (although they were not deductible under the Alternative Minimum Tax).
The PTET is an optional tax that partnerships and New York S corporations may annually elect to pay on certain income. Eligible entities may opt in on or after January 1 through March 15. The election to opt in to the PTET must be made online on an annual basis and is irrevocable during that year.
Under PTET, business earnings are taxed on the electing entity’s state tax return and the partners/disregarded entities/shareholders receive credits on their individual state returns. By opting in, the business entity will voluntarily elect to pay an entity-level income tax on at least a portion of its income allocated to only individual partners and shareholders at graduated rates starting at 6.85% on taxable income of $1 or more and increasing to up to 10.9% on incomes in excess of $25 million. PTET payments are made as quarterly estimated PTET payments on March 15, June 15, September 15 and December 15 of the election year.
The tax paid is deductible on the eligible pass-through entity’s federal tax return and reflected as a reduction of the individual partners’ or shareholders’ income or loss reported on a Schedule K-1. The state provides partners and shareholders of eligible electing pass-through entities a tax credit against state personal income tax for their share of the PTET, thereby circumventing the federal, state and local tax cap. For New York and New Jersey residents, it is a dollar for dollar tax credit, in that each eligible credit claimant’s PTET credit is equal to his/her direct share of PTET that was reported by the pass-through entity on its return. This varies by state, particularly in Connecticut, where only 87.5% is applied as a credit.
If you would like to discuss how the PTET can affect your returns, please reach out to us. You may reach our Office Manager, Maria Mosa, at firstname.lastname@example.org or 914-617-7620 ext. 118, and she will put you in touch with a partner to assist you.