A Practical Guide to the Tri-State Pass-Through Entity Taxes
Geoffrey Kayton, Principal, Citrin Cooperman Advisors LLC / Berdon Advisors LLC
03.28.22 | TAX Chat
This is a practical guide to navigating the main concepts associated with the pass-through entity (PTE) taxes for New York, New Jersey, and Connecticut. First, we cover some of the governing rules, then provide a simple comparison chart, and end with key takeaways. This is not an in-depth analysis of any of the taxes but is meant to inform taxpayers just enough to ask the right questions.
PTE Tax Governing Rules
Connecticut (CT PET) – Not elective. PTE pays 6.99% of CT source income. Estimated tax is due throughout the year, and the credit is reported on the partners’ K-1s. If the credit is reported to another PTE, it passes through to the owners. Provides an 87.5% refundable credit of tax due.
New Jersey (NJ BAIT) – Has changed every year since its inception. Effective 2022, the governor signed a ‘clean-up’ bill that seemingly makes the tax workable. The issues which prompted the ‘clean-up’ are outside the scope of this analysis. For 2022, an electing PTE pays tax on its NJ taxable income ranging from 5.675% below $250,000 to 10.9% over $5 million. For this purpose, NJ taxable income is defined as 100% of NJ resident members and is the NJ source income of nonresidents and entities. 100% of the tax paid is reported as a refundable credit to PTE members. Elections are due as of the due date of the return (the 15th day of the third month), and estimates are due throughout the year.
New York (NYS PTET) – Relatively complex. The taxable income, for this purpose, only includes amounts allocated to individuals and trusts; NY residents are taxed on 100% of the PTE income, and nonresidents are taxed on only the NY source income. Entity owners are excluded and can make their own elections. Since excluded, many PTEs are distributing a ratable share of cash to excluded members. Different sets of rules apply to partnerships and S Corporations (specifics are outside the scope). Tax rates range from 6.85% below $2 million to 10.9% over $25 million. The election is due on the 15th day of the third month after the start of the tax year (i.e., the election is due in advance). Estimates are due throughout the year. 100% of the tax paid is reported as a refundable credit to the members.
|Concept||New York||New Jersey||Connecticut|
|Tax Base||Only individuals and trusts – 100% of residents; NYS source of nonresidents||100% of residents; NJ source for nonresidents and PTEs||CT source income|
|Rate Range||6.85% - 10.9%||5.675% - 10.9%||6.99%|
|Applicable Entity Types||Individuals & Trusts||Any||Any|
|Election Due Date||2.5 months after start of tax year||2.5 months after end of tax year||Not elective|
Connecticut – Not elective and relatively straightforward. Tax is based on CT source income at a flat rate of 6.99%, credit at 87.5% of payments, and credit flows through multi-layer PTE structures.
New Jersey – After a ‘clean-up’ bill, this tax has similar concepts to both CT and NYS versions. The tax can flow through a multi-layer PTE structure (i.e., to and through partnerships and S Corporations), as does the CT PET. Similar to NYS, the residency of the partner affects the amount of income that is taxable – NJ residents are taxed on 100% of their allocable income, and nonresidents, just on their NJ source amount.
New York – Complex application; only applies to individuals and trusts. Entities with individual and trust, and entity owners must consider this disparate treatment in allocations and distributions. PTE members must consider elections at different levels of any multi-layer PTE structure. Elections due in advance – 2.5 months into the tax year in which it applies. NYS residents are taxed on 100% of PTE income, and nonresidents are taxed only on the NY source income.
In General – Make sure members’ resident state allows a credit for the tax paid before making decisions that could be affected by the tax. If a credit is not allowed, the member is effectively required to pay state tax on the income twice.
If you have questions, I can be reached at 212.331.7525 | firstname.lastname@example.org
Geoffrey Kayton is a Senior Tax Manager with more than 10 years of professional experience. He advises a diverse array of clients across the real estate sector on a variety of tax matters.