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Pass-Through Entity Tax Additional Guidance Finally Issued by New York State

Berdon Tax Team

9.9.21 | Client Alert

The October 15, 2021 deadline is quickly approaching for making the New York State Pass-Through Entity Tax (PTET) election for 2021. The New York State Department of Taxation (the “Tax Department”) finally released much needed guidance, in the form of a Technical Services Bulletin Memorandum (TSB-M-21(1)C, (1)I) (TSBM), covering many open issues, including how to make the PTET election and pay the tax. This brief summary of the New York guidance supplements Berdon’s previous PTET Client Alerts – 8.24.21 Navigating The New York Pass-through Entity Tax: A Handy FAQ and 6.8.21 The NYS Pass-through Entity Tax … Pay This Tax to Pay Less Tax.

The key takeaways from the Tax Department’s new TSBM and the Department’s website are as follows:

  • For PTEs that elect to pay the PTE tax for 2021, their owners will effectively pay NYS estimated income tax twice on the PTE income for 2021, resulting in significant overpayments on their 2021 personal NYS income tax returns. Thus, cash flow issues should be weighed against potential federal tax savings from the deduction in 2021.
    • Individual taxpayers are required to make NYS estimated payments for 2021 calculated without giving effect to potential PTET credits, notwithstanding the tax paid at the entity level.
    • The Tax Department will provide an online mechanism for electing entities to pay the PTET prior to December 31, 2021. (Note that the New York PTET law does not require payment of the 2021 PTET until March 15, 2022 for the 2021 tax year, but payment must be made prior to year-end in order to receive a federal deduction in 2021.) Any 2021 PTET not paid earlier must be paid by March 15, 2022.
    • This will result in large overpayments of New York State personal income tax for 2021, which will ultimately be credited or refunded to the owners upon filing their 2021 New York personal income tax return.
    • Note that PTET overpayments (i.e., if PTE estimates exceed the final PTE tax liability) cannot be transferred to partners for personal income tax purposes. The PTET can either apply for a refund of PTET or apply the overpayment to the next PTET year.
    • It is likely that some or all of the NYS tax overpayment from 2021 will be taxable federally in 2022, mitigating to some extent the benefit of electing into the PTET for 2022.
  • Trust PTE owners, other than those classified as grantor trusts, can apply their PTET credit against the trust’s tax liability only.
    • A trust (other than a trust disregarded for tax purposes) may not pass out the PTET credit to its beneficiaries.  The credit can only be used against the tax liability of the trust itself, with any excess being refunded or applied to subsequent years.  Thus, PTE owner trusts that distribute some or all of their income annually must consider the efficacy of participating in PTET in their particular contexts.
  • The PTET Election Can Only be Made Online by an Authorized Person
    • PTEs must create a business online service account with the NYS Department of Taxation and Finance if they don’t already have one.
    • An authorized person for an S Corporation is any officer, manager or shareholder who is authorized under the law of the state where the corporation is incorporated or under the corporation’s organizational documents.
    • An authorized person for a partnership/LLC is any member, partner or owner with authority to bind the entity as currently set forth under the New York Tax Law.
  • Credits for Taxes Paid to Other States
    • The new guidance reiterates that New York State will permit a resident taxpayer a credit for another state’s PTET, if the nonresident state’s tax is substantially similar to the NY PTET.  While the definition of substantially similar has not been clarified, the Department will issue a list of substantially similar taxes on its website.
  • Considerations for PTEs for tax years starting January 1, 2022, or later.
    • The PTET election is due March 15 of the calendar year (e.g., for PTE calendar 2022, the election is due March 15, 2022; but see fiscal year-end taxpayer rules below).
    • The PTE must make estimated payments that are due on March 15, June 15, September 15, and December 15 of the tax year.
    • To avoid penalties, PTEs will need to pay the lesser of 90% of the PTET required to be shown on the return for the current year or 100% of the PTET shown on the return for the preceding year.
    • The PTET return is due March 15th following the close of the calendar year (see fiscal year-end taxpayer rules below).
  • All PTET Returns are filed on a calendar-year basis.
    • A fiscal-year taxpayer does not recompute its income on a calendar-year basis. Instead, its PTE taxable income must be computed for the fiscal year that ends within the PTET calendar year.
    • The PTET return for an electing entity with a fiscal year is due on or before March 15, following the close of the calendar year in which its fiscal year ends.

Example: A partnership’s fiscal year is March 1, 2021 through February 28, 2022.  Although the partnership reports its income for Article 22 purposes on a 2021 IT-204, Partnership Return, the partnership will make its PTET election for the 2022 PTET taxable year by March 15, 2022 and file its PTET return by March 15, 2023.

In considering a PTET election, cash flow demands and tax savings must be carefully considered. Especially so for the 2021 tax year, as the PTET election deadline is October 15, 2021. Individual owners cannot elect out of the PTET. The PTE level election binds all taxable owners (i.e., individuals and taxable trusts). Therefore, it is important to note that the PTET election may not be favorable for all PTE owners (e.g., some owners with NOLs may derive no benefit from a PTE tax credit, some owners might live in states that will not allow a resident tax credit for the NY PTET,  taxable trusts that distribute all of their income may derive no benefit, etc.). Deciding whether to elect the PTET is a complicated decision that should be discussed with your Berdon Tax Advisor.