New York Pass-Through Entity Tax Updates

On April 9, 2022, New York Governor Hochul signed the New York State 2022/2023 Budget Bill (Bill) into law, which made significant changes to New York State Pass-through Entity Tax (NYS PTET) and introduced a New York City Pass-through Entity Tax (NYC PTET).

NYS PTET Updates

For a summary of the original NYS PTET, please refer to our previously issued NYS PTET article.

Under the prior PTET legislation, the taxable income subject to PTET for an electing S corporation only included income, gain, loss, or deduction to the extent that these items were derived from New York sources while taxable income subject to PTET for an electing partnership was not limited to New York sourced. The Bill made a change to lessen this uneven application of the law and maximize the possible Federal deduction benefit to resident shareholders of electing S corporations.

The Bill created two categories of S corporations for PTET purposes effective January 1, 2022:

1) Electing Resident S Corporation
2) Electing Standard S Corporation

An Electing Resident S Corporation is one that certifies at the time of its annual PTET election that all its shareholders are residents of New York State under Article 22. For tax year 2022 only, the certification must be made by March 15, 2023. By making the irrevocable certification, taxable income for determining NYS PTET includes all items of income, gain, loss, or deduction to the extent those items are included in taxable income of the resident shareholders.

An Electing Standard S Corporation is one that does not certify that all its shareholders are New York State residents, meaning one or more of the shareholders of the electing S corporation are nonresident of New York State at the time of its annual PTET election or residency of shareholders could change during the year. Electing Standard S Corporations will continue to use all items of income, gain, loss, or deductions to the extent that these items are derived from New York sources for the calculation of PTET.

Changes to NYS PTET Required Estimated Tax Payments

The Bill had extended the annual PTET election deadline for tax year 2022 to September 15, 2022, for those eligible entities that may have missed the original annual PTET election due date. As a result of this extension, there are some required 2022 estimated tax payments to be made for the tax year 2022 for the election to be valid:

NYC PTET

The Bill had introduced the New York City Pass-Through Entity Tax (NYC PTET) under new Tax Law Article 24-B. There is still additional information to be released, but the following is the summary of the information available so far.

Effective Date

Taxable years beginning on or after January 1, 2022

Who is Eligible

An eligible city partnership or eligible city resident S corporation may annually elect to pay the NYC PTET.

An Eligible City Partnership is any partnership (including LLC treated as a partnership for New York and federal income tax purposes) that has elected to participate in the NYS PTET and:

• Has a filing requirement under Tax Law § 658(c)(1)
• Is not a publicly traded partnership
• Has at least one partner or member that is a city resident individual*

An Eligible City Resident S Corporation is any New York S corporation (including LLC treated as an S corporation for New York State and federal income tax purposes) that has elected to participate in the NYS PTET and:

• Made the election to be taxed as a resident S corporation under Article 24-A
• Is subject to the fixed dollar minimum tax under Tax Law § 209
• All shareholders are city resident individuals*.

*A partner, member or shareholder should be treated as a city resident if they are a resident of New York City for New York City personal income tax purposes for at least half of the year. Otherwise, they should be treated as nonresidents for NYC PTET purposes.

Election

The irrevocable annual election must be made by an authorized person of the eligible city partnership or eligible city resident S corporation. Tax professionals may not make this election on behalf of their clients.

Taxable Income
Generally, the NYC PTE taxable income includes all income, gain, loss, or deduction of an electing entity that flow through to a direct partner, member, or shareholder for New York City personal income tax purposes without regard for any limitations that would be imposed on the partner’s, member’s, or shareholder’s federal or New York State personal income tax returns.

Tax Rates
Flat 3.876% of the NYC PTE taxable income.

Estimated Tax Payments

Tax Credit:

A direct partner or member, or direct shareholder of electing entities is allowed to take his or her direct share of NYC PTE tax credit to the extent that the amount of NYC PTE tax is paid by the electing entity for the taxable year. The credit can be claimed on Form IT-653, Pass-Through Entity Tax Credit, which must be attached to his or her NYS personal income tax return. Any excess NYC PTE credit will be treated as an overpayment and can be credited or refunded without interest. In the case that a partner, member, or a shareholder is a disregarded entity for the tax purposes, it will be disregarded for purposes of determining who is the direct partner or member of an electing entity. The information for both the disregarded entity and the owner of the disregarded entity who is ultimately claiming the credit must be reported on the annual PTE tax return to be qualified for the PTE tax credit.

Addition modification to income – an eligible taxpayer claiming the NYC PTET credit must make an addition modification to federal adjusted gross income or federal taxable income on the eligible taxpayer’s New York State personal income tax return for an amount equal to the amount of the NYC PTET credit claimed.

Annual PTET Return

Each electing entity must file an annual PTE tax return by March 15 following the close of the taxable year. The NYS PTET and NYC PTET will be reported on the same PTET return. This due date applies to the fiscal year filer as well, but a fiscal year taxpayer does not recompute its income on a calendar year basis, instead, its NYC PTE taxable income must be computed for the fiscal year that ends within the NYC PTET calendar year. The NYC PTET return for an electing entity with a fiscal year is due on or before Mach 15 following the close of the calendar year in which its fiscal year ends.

An electing entity may make an online request by March 15 for a six-month extension of time to file its annual NYC PTET return. No amended return is available without the consent of the commissioner.

We will continue to provide any updates regarding NYS/NYC PTET as it becomes available to help your decision making. Please contact us if you have any questions or want to consider making the required election.

Sincerely,
The Partners and Staff
LHF