Key Changes to the NYS PTET Bound to Make Taxpayers Happy

Many states enacted workarounds for the federal, state, and local (“SALT”) tax $10,000 cap. Most were not perfect when hastily drafted. Earlier this year New Jersey and California made needed changes to their SALT cap workarounds.

Recent changes to the New York State Pass Though Entity Tax (“NYS PTET”) provisions (“the Legislation”) are likely to provide some significant benefits to partners, members and S Corporation shareholders. Moreover, the enactment of a New York City Pass Through Entity Tax adds more spice to the tax savings opportunities. Some of these changes were incorporated into the New York State Budget signed by the Governor on April 9, 2022. Others are part of recently passed legislation which is expected to be signed shortly.

New York State Changes

The Legislation created a new filing opportunity for S Corporations in which all shareholders are residents of New York State (“Resident S Corporation”). In such a case, all of the income allocated to the shareholders would now be subject to the PTET, rather than only the New York source income.

This new provision is effective for tax years beginning on or after January 1, 2022. Since the original date to elect into the New York State PTET tax regime for 2022, March 15th, had already passed by the time the new legislative provisions were enacted, subsequent legislation was introduced in, and passed by both houses of the state legislature, pushing back the 2022 PTET election date for partnerships and S Corporations to September 15 of this year (the normal election date remains March 15). Thus, entities that may have wanted to elect into the PTET, but for some reason missed making the election by March 15, now have until September 15 to make the election. In addition, entities formed after the original election date now have until the September 15 extended election date to elect into the PTET regime.

Further, S Corporations having all resident shareholders that may not have made the election originally because the entity had little or no New York source income now have the opportunity to reexamine that decision since all income of the S Corporation will be subject to the PTET, not merely an allocated portion of it. Resident S Corporations must file a state mandated certification attesting to the resident status of all of their shareholders at the time the PTET election is made. If the certification is not filed, Resident S Corporation status will be denied and the regular S Corporation allocation rules will apply. For S Corporations that have already elected into the PTET and qualify for Resident S Corporation status, the new required certification must be filed no later than September 15 of this year.

Estimated Tax Impact

Any S Corporation that elected into the PTET by the original March 15 election date and will now be certifying as a Resident S Corporation for 2022 by the extended September 15 date is required to make its June 15 estimated tax payment based on the old allocation rules. However, it will have to make a “true-up” payment by September 15 to make sure that 75% of its projected liability under the new resident shareholder rules has been remitted to the state.

New York City PTET

Effective for tax years beginning on or after Jan. 1, 2023, an optional NYC PTET is available to any partnership that files a New York State partnership return or for S corporations where all of the shareholders are residents of New York City. The tax is in addition to all other current taxes including the Unincorporated Business Tax and the General Corporation Tax.

In the case of partnerships, the tax is imposed on the non-apportioned and unallocated pro-rata shares of income attributable to New York City residents, and only city residents are permitted a credit for such taxes. With respect to S corporations, all of the income of the shareholders, all of whom must be residents of New York City, is included in the PTET tax base. The tax rate is 3.876%.

Similar to the NYS PTET program, an annual election must be made by March 15 of the tax year at issue. Furthermore, quarterly estimated payments are required, with the first one being due on March 15 of the subject tax year. The tax return is due March 15 of the year after the tax year ends.

New York City residents of electing entities are entitled to a credit against their city personal income tax liability. Similar to the state program, the amount of the NYC PTET credit is added back in computing the individuals’ state income

Personal Income Tax Provisions

Additionally, for New York personal income tax purposes, the amount of NYS PTET credit claimed by partners, members, or shareholders of electing entities on their New York income tax returns is only required to be added back once, under section 612(b)(43), using Form IT-225, New York State Modifications. The Legislation amended section 612(b)(3) to include new subsection (c), which states “income taxes,” for the purposes of determining personal income tax, do not include the NYS PTET to the extent it is added back under section 612(b)(43). The amendment also provides that “income taxes” do not include other state pass-through entity taxes that are substantially similar to the NYS PTET, and are added back under section 612(b)(43), using Form IT-225. The changes are retroactive for tax years beginning on or after January 1, 2021.

City Guidance

The Legislation made it clear that the NYS PTET, and newly enacted NYC PTET, are required to be added back on the General Corporation Tax and Banking Corporation Tax returns in computing New York City income. The changes are retroactive for tax years beginning on or after January 1, 2021.

This ‘clean-up’ legislation removes some of the impediments created by the original PTET law and makes it possible for taxpayers to benefit from their business losses and credits. Contact Tom Corrie or your Marcum LLP advisor with any questions.