September 15, 2021
New York tax department issues guidance on new pass-through entity tax; 2021 election must be made by October 15, 2021
The New York Department of Taxation and Finance (NY DOTF) issued guidance1 on the newly-enacted elective tax on pass-through entities (which applies to certain eligible partnerships, S corporations and limited liability companies (LLC) treated as either, referred to herein as a PTE).2 The new elective PTE tax is intended to permit eligible partners, members and shareholders of an electing PTE (an electing entity) to indirectly deduct for US federal income tax purposes their respective share of NYS taxes paid by the PTE in excess of the $10,000 limitation imposed on the deductibility of state and local taxes by IRC Section 164(b)(6), consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690).
Making a NYS PTE Tax election
The PTE tax election can be made annually, starting in tax years beginning on or after January 1, 2021. Only an authorized person3 can make the election on behalf of an eligible PTE. An eligible partnership also includes a partnership with partners that are not eligible for a PTE tax credit, such as corporate partners.
According to the guidance, entities not eligible to make the PTE tax election include single member LLCs, sole proprietorships, trusts, non-profit corporations and corporations that are not New York S corporations.
A PTE tax election, once made, is irrevocable. The election must be made online on an annual basis. Electing PTEs that are calendar-year taxpayers must use a calendar-year basis to elect, file and pay the PTE tax; fiscal year taxpayers must elect, file and pay PTE tax for the calendar year in which its fiscal year ends.
For tax year 2021, an authorized person has until October 15, 2021, to file a PTE tax election through an eligible entity's Business Online Services account. (If the entity does not have a Business Online Services account, the authorized person will need to create one.) Fiscal year taxpayers whose 2021 tax year began before January 1, 2021, are not eligible to make the 2021 PTE tax election.4
For tax years beginning on or after January 1, 2022, the annual election can be made online on or after January 1 of each such year but no later than March 15 of that year.
Calculating PTE taxable income
An electing entity's PTE taxable income includes all of its income, gain, loss or deduction flowing through to direct partners, members or shareholders5 for N.Y. Tax Law Article 22 (personal income tax) purposes.
An electing New York S corporation calculates its PTE taxable income by aggregating the income, gain, loss or deduction flowing through to direct members or shareholders subject to New York personal income tax under N.Y. Tax Law Article 22. Aggregated income and gain is reduced by losses or deduction without regard to limitations (e.g., capital losses, passive activity losses, basis limitations) that would be imposed on a member's or shareholder's federal and New York personal income tax returns. An S corporation then apportions the net amount of taxable income using the N.Y. Tax Law Article 9-A corporate apportionment rules set forth in N.Y. Tax Law Section 210-A.
In calculating PTE taxable income, an electing partnership must include all items of income, gain, loss or deduction to the extent such item would flow through to, and be included in, the taxable income of direct partners and members subject to New York personal income tax, including guaranteed payments. Excluded from an electing partnership's PTE taxable income is any income, gain, loss or deduction flowing through to a direct partner that is a partnership or entity not subject to tax under N.Y. Tax Law Article 22 (including partner income ultimately subject to tax under N.Y. Tax Law Article 22 tax received through a tiered partnership) such as a corporation subject to N.Y. Tax Law Article 9A.6
For PTE tax purposes, an electing partnership must classify direct partners or members as either a resident or nonresident of New York; a direct partner or member cannot be classified as a part-year resident.7 The partnership will then compute both a resident PTE taxable income pool and a nonresident PTE taxable income pool, and add these amounts together. This PTE taxable income calculation applies to partners and members who do not have special allocation of profits that differ from their allocation of losses. When there is a special allocation, such allocations will be taken into account by the electing partnership when it computes each pool. The PTE Tax Technical Memorandum TSB-M-21(1)C, (1)l (TSB) contains guidance on calculating the resident and nonresident taxable income pools.8
Calculating the PTE tax
The PTE Tax TSB describes how to calculate the PTE tax, which is in addition to other taxes imposed by New York State.
The PTE Tax TSB includes the following schedule of the graduated PTE tax rates:9
Calculating PTE tax credits
An electing entity must include on its return its total PTE tax and the direct share of its PTE tax that will be made available in the form of a PTE tax credit to each direct partner, member or shareholder. The total amount of PTE tax credits reported by an electing entity cannot exceed the total amount of PTE tax paid by the electing entity. The PTE tax credit is only available to direct partners, members or shareholders subject to New York personal income tax (hereafter, eligible taxpayers).
The electing entity must include sufficient information on the PTE tax return to identify all eligible taxpayers and their PTE tax credit amounts. According to the PTE Tax TSB, if this information is not provided, eligible taxpayers "will not be entitled to utilize" their PTE tax credit on their New York personal income tax return. In addition, eligible taxpayers will not be entitled to any PTE tax credit if the electing entity's total PTE taxable income is zero (or less). In this instance, the electing entity can file an annual PTE tax return to request a refund of any PTE tax estimated tax payments.
An electing S corporation will compute each eligible taxpayer's PTE tax credit by multiplying its total PTE tax by the eligible taxpayer's ownership percentage.
An electing partnership must compute a resident and nonresident PTE tax credit pool before computing each eligible taxpayer's PTE tax credit. This PTE calculation applies to partners and members who do not have special allocation of profits that differ from their allocation of losses. When there is a special allocation, such allocations will be taken into account by the electing partnership when it computes each pool.10 In addition, each eligible taxpayer's profit and loss ownership percentage within the eligible taxpayer's taxable income pool must be computed. The PTE Tax TSB explains the computation of this profit and loss ownership percentage, including specific guidance (1) when the resident and nonresident PTE taxable income pools are each more than zero, (2) when the nonresident PTE taxable income pool is zero or less, and (3) when the resident PTE taxable income pool is zero or less. Examples are provided.11
Claiming PTE tax credits
PTE tax credits are claimed by eligible taxpayers on Form IT-653, Pass-Through Entity Tax Credit. The form must be attached to the eligible taxpayer's New York State personal income tax return. A taxpayer must file an individual personal income tax return to claim the credit.12 PTE tax credits cannot be claimed on a composite return. A non-disregarded trust that is a direct partner, member or shareholder in an electing entity can claim the PTE tax credit on its personal income tax return; the trust cannot distribute PTE tax credits it receives to its beneficiaries.
PTE tax credits cannot be claimed by partners, members or shareholders who are not subject to the New York personal income tax imposed under N.Y. Tax Law Article 22 (e.g., corporations) or by a partner that is itself a partnership.
An eligible taxpayer will have PTE tax credits equal to its direct share of PTE tax reported by the electing entity on its annual PTE tax return. If a taxpayer receives more than one PTE tax credit, the credit will be aggregated on the taxpayer's personal income tax return. The amount of allowable credit exceeding the taxpayer's tax due for the year will be treated as an overpayment and it will be credited or refunded without interest.
An eligible taxpayer claiming the PTE tax credit must add back to federal adjusted gross income (FAGI) or federal taxable income (FTI) on their New York State personal income tax return the amount of the PTE tax credits claimed.
Resident tax credit
Resident partners, members or shareholders are allowed to claim a resident tax credit against their New York State personal income tax for any PTE tax paid to another state, local government or the District of Columbia, that is substantially similar to the NYS PTE tax paid by a partnership or New York S corporation, including LLCs taxed as such. The resident tax credit can be claimed for tax years beginning on or after January 1, 2021. Generally, this credit cannot be claimed by a shareholder or partner before 2021; however, a shareholder or partner will be allowed a resident tax credit if the taxes are calculated on the income of the S corporation or partnership but are imposed and payable by the shareholder or partner.
According to the PTE Tax TSB, the NY DOTF stated that it will be posting on its website a list of substantially similar state and local PTE taxes that qualify for the resident tax credit.
Resident partners, members or shareholders must add back to FAGI or FTI on their New York State personal income tax return the amount of PTE tax paid to another state, local government or the District of Columbia on their behalf. That amount is the basis for computing the resident tax credit.
Estimated tax payments
For tax year 2021, an electing PTE is not required to make estimated PTE tax payments. The electing PTE, however, may make optional online estimated tax payments before December 31, 2021. The online estimated tax application will be available by December 15, 2021. Whether an estimated PTE tax payment is made in 2021, the PTE Tax TSB states that estimated payments for New York personal income tax purposes for 2021 still must be timely made by, or on behalf of, partners, members or shareholders of a PTE. These personal estimated income tax payments for 2021 must be calculated as if the PTE tax credit did not apply. Moreover, estimated personal income tax payments of the PTE partners, members or shareholders are not considered a pre-payment of PTE tax and may not be applied to the payment of PTE tax liabilities.
For tax year 2022 and thereafter, however, electing PTEs are required to make estimated payments of PTE tax. Estimated payments are due on March 15, June 15, September 15 and December 15 in the calendar year before the due date of the PTE tax return and regardless of the PTE's own fiscal year. PTE tax estimated payments will only be applied to the PTE tax liability and cannot be applied to any other taxes. Estimated payments may not be transferred between related entities or individuals. Penalties and interest will be imposed on underpayments and late payments.
Annual return due dates and extensions
The annual PTE tax return is due on or before March 15 and it must be filed using the online return application. PTE tax returns are filed on a calendar-year basis. Fiscal-year taxpayers compute PTE taxable income for the fiscal year that ends within the PTE tax calendar year, and also must file the PTE tax return on or before March 15 following the close of the calendar year in which its fiscal year ends. A six-month filing extension is available to electing entities that make an online extension request by March 15.
PTE tax returns, once filed, cannot be amended.
Penalties and interest will be imposed on late filing and late payments.
When considering whether to make the New York State PTE tax election, partnerships and New York S corporations with New York State PTE taxable income may want to consider the following factors:
PTEs considering the New York State PTE tax election are encouraged to prepare tax models to compute the potential federal personal income tax benefit to their owners as a workaround the federal $10,000 SALT deduction limitation, as well as the state and local personal income tax implications of making this election. PTEs should also strongly consider any changes to the federal $10,000 SALT deduction limitation rules.
As indicated above, the New York State PTE tax election provisions and estimated tax payment rules are different for tax year 2021 and tax year 2022 and thereafter. Accordingly, entities considering electing into the New York State PTE tax and eligible taxpayers should strongly consider these differences to avoid missing filing and payment due date requirements. For instance, eligible entities considering making a New York State PTE tax election for tax year 2021 must do so by October 15, 2021. For tax year 2022 and thereafter, eligible entities will have until March 15 to make the election. Estimated tax payments are not required in 2021 but are required starting in 2022 (but failure to make an estimated PTE tax payment in 2021 may mean that the owners are ineligible to claim a state and local tax deduction in excess of the $10,000 SALT deduction limitation for federal income tax purposes).
The NY DOTF indicated that it will be posting additional PTE tax information on its website as it becomes available.
1 N.Y. Dept. of Taxn. and Fin., TSB-M-21(1)C, (1)I (Aug. 25, 2021) (PTE Tax TSB).
2 Primarily codified at N.Y. Tax Law Art. 24-A (sections 860 to 866) (see Tax Alert 2021-0806).
3 As described in the PTE Tax TSB, an authorized person of a partnership includes "any member, partner, owner, or other individual with authority to bind the entity or sign returns under [N.Y.] Tax Law [Section] 653" and for an S corporation includes "any officer, manager, or shareholder of the New York S corporation who is authorized under the law of the state where the corporation is incorporated or under the S corporation's organizational documents to make the election and who represents to having that authorization under penalty of perjury."
4 See example under "Election — When to make the election" on the NY DOTF PTE tax webpage.
5 The PTE Tax TSB states that "[a] direct member, partner, or shareholder is any member, partner, or shareholder that is issued a federal Schedule K-1 by the electing entity based on the member's, partner's or shareholder's direct ownership interest in the electing entity." Further, a Schedule K-1 issued to a disregarded entity will be deemed issued directly to the individuals or entities that include the disregarded entity's activity on their tax returns.
6 Under other New York and federal law, the PTE taxable income should not include the income of a retired partner that is not subject to New York State personal income tax, an exempt entity that is not subject to New York State personal income tax or a non-US partner whose income is not subject to federal or New York State personal income tax. See TSB-M-07(2)I (Jan. 24, 2007) and NYS Tax Law Section 631.
7 The PTE Tax TSB states that a trust will be classified as resident or nonresident based on the residency status of the trust.
8 The PTE Tax TSB does not address how special allocations should be taken into account.
9 These graduated rates are consistent with the increases in the New York State personal income tax rates that were revised and effective for tax years beginning on or after January 1, 2021.
10 The PTE Tax TSB does not explain how special allocations will be taken into account.
11 The PTE tax credit pools are conceptually consistent with the PTE taxable income pools.
12 The NY DOTF said the PTE tax credit may not be claimed on Form IT-203GR, Group Return for Nonresident Partners, or Form IT-203-S, Group Return for Nonresident Shareholders of New York S Corporations.