NYC Resident Owners of a Pass-through Entity May Benefit from the New York City Pass-Through Entity Tax
10.31.22 | SALT Chat
In the past year, many states adopted pass-through entity tax legislation as a workaround for the federal $10,000 state and local tax deduction cap. Currently, more than half of the states have some form of pass-through entity tax. Through its 2022-2023 budget bill, New York adopted an optional pass-through entity tax for New York City (“NYC PTET”) for tax year beginning on or after January 1, 2023. This is in addition to the existing New York State Pass-Through Entity Tax (“NYS PTET”) that took effect in 2021. Amendments to the bill signed into law later in May moved up the effective date to January 1, 2022. Given the high City income tax rate at almost four percent, the City resident owners may gain additional federal benefit from the NYC PTET. The NYC PTET operates similarly to the NYS PTET. Here are some basics:
- Eligibility: Only pass-through entities (PTEs) that have elected to participate in the NYS PTET can elect. Partnerships and LLCs taxed as a partnership should have at least one partner or member that is an NYC resident individual. For S corporations, all its shareholders must be NYC residents.
- Election: For the 2022 tax year, the election is due on March 15, 2023. For 2023 and after, the election is due on March 15 of the year of election. An authorized person of the electing PTE must make the election through the entity’s NYS Business Online Services account. The election is irrevocable as of the due date.
- Estimated Tax Payments: Estimated tax payments for the NYC PTET are not required for the 2022 tax year. To claim a federal deduction, however, the electing PTE is encouraged to make optional online payments before December 31, 2022, using the entity’s NYS Business Online Services account. For 2022, NYC personal income tax estimated payments must continue to be made by or on behalf of the NYC resident owners of the electing PTE without regard to the NYC PTET credit. Starting 2023, at least 25% of the requested annual NYC PTET payment for the tax year (i.e., lesser of 90% of the current year’s tax or 100% of the preceding year’s tax) should be made quarterly.
- Credit: Each eligible taxpayer that is subject to NYC personal income tax may claim the credit that is equal to their direct share of the NYC PTET on their NYS personal income tax return.
Sarah S. Kim is a Senior Tax Manager in Berdon’s State and Local Tax Group with over 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.