NYS PTET Memo

What is the NYS PTET (“Pass-Through Entity Tax”) (NYS Technical Memorandum TSB-M-21(1)C)?

  • The NYS PTET is a tax paid through a business entity for the benefit of its owners.
  • The purpose is to get a “work around” of the state and local tax deduction restriction (“SALT”), in the amount of $10,000, enacted with the tax law changes for the 2018 tax year, for individual taxpayers.
  • By allowing the PTET (NYS passed a bill in April 2021, to allow the NYS PTET starting with the 2021 tax year), the entity can take a business deduction against its income for the full amount paid for the PTET, on its federal partnership or S corporation business tax return. As a result, the entity’s net taxable income is lowered, dollar for dollar, for the full amount paid, with no restriction.  Please note that in order to get the deduction for NYS PTET taxes paid, NYS is basing this deduction on a CASH BASIS (even if the entity is on an accrual basis for income tax purposes).  However, for NYS entity tax purposes, the deduction taken for federal purposes is an addback to NYS net taxable income (an “addition modification” for state taxes based on income).
  • Individual owners (including grantor trusts and other qualifying trusts) of the flow-through entity electing the NYS PTET, partners for partnerships and shareholders for S corporations, are then allowed to take their respective amounts (based on profit and loss %s) of the PTET paid through their entities, as a credit against their NYS personal income tax liabilities. Please note that “disregarded entities” (single member LLCs) and corporations are not eligible for purposes of calculating the NYS PTET within that entity.

 

Who Qualifies and Making the Election

  • “Flow-through entities” qualify: Partnerships (LLCs) and S corporations.  Please note that publicly traded partnerships do not qualify for this election.
  • The entity needs a NYS online account to elect, file the return, and to pay estimated taxes. If the entity pays NYS payroll taxes and/or NYS sales taxes, then the entity already has a NYS online account.
  • To create a NYS online account, go to https://www.tax.ny.gov/online/.
  • Once in the NYS online account, go to the “menu” on the left of the screen, and there are 2 options: “Corporation tax, PTET webfile” for S corporations and “Partnership tax, PTET web file” for partnerships (LLCs). Choose the web file for the entity that you are making the election for.
  • NYS has made it very clear that only an “authorized person” can make this election on behalf of the entity. The idea being that outside agents or professionals, like accountants, tax preparers, attorneys, etc., are not supposed to be electing the NYS PTET on behalf of its clients. For S corporations, any officer, manager, shareholder, or any individual with financial responsibility, and for partnerships, any member, partner, owner, or any individual with financial responsibility, can make this election.
  • Note for tiered partnerships: If a partnership has partners that are also partnerships, then the election would be made at the partner’s entity level, not at the original partnership level.

 

When are the Elections Needed to be Made?

  • For the 2021 tax year: By October 15, 2021.
  • For the 2022 tax year: By March 15, 2022.
  • For tax years after 2022: By March 15, following the calendar year end of the entity.
  • All elections are irrevocable. Meaning that once you elect for a given tax year, then you cannot get out of it, and that the respective tax due for that tax year needs to be paid, based on the rates as stipulated by NYS.
  • This election is a completely voluntary and it is not REQUIRED to be made.
  • This election needs to be made on an annual basis. It does not carry over from year to year once the entity elects for the first time.

 

How is the PTET Calculated?

  • In general, the PTET is imposed on all taxable income/losses of the electing entity, that flows through to the individual owners of the entity.
  • For S corporations, the net taxable income subject to the PTET is the amount of net taxable income allocated to NYS only. So, if there is net taxable income allocated to other states, within the S corporation, then that amount of net taxable income allocated out of NYS is not included in the NYS PTET calculation.
  • For partnerships, an electing partnership is required to classify all partners as either resident or nonresident of NYS. Any partner that is a NYS resident for at least 6 months of an electing tax year, is deemed to be a NYS resident for this purpose.  Part-year classification is not an option.  Qualifying trusts are considered residents or nonresidents based on the nexus of the trust, not its beneficiaries.
  • The partnership’s net taxable income is then separated into resident and nonresident categories. If all net taxable income within the entity is from NYS sources, then all such income is included in the calculation for the NYS PTET, as it relates to NYS nonresidents.  And, if there are no specific allocations of net taxable income to the partners, then all taxable net income is included in the PTET calculation.  If there are specific allocations of net taxable income to partners, then only the net taxable income allocated to nonresidents are subject to the NYS PTET, as it relates to NYS nonresidents.

 

NYS PTET Tax Rates

  • $2M or less, 6.85% of NYS PTET taxable income.
  • Greater than $2M but less than $5M, $137,000 plus 9.65% of the excess NYS PTET taxable income over $2M.
  • Greater than $5M but less than $25M, $426,500 plus 10.30% of the excess NYS PTET taxable income over $5M.
  • Greater than $25M, $2,486,500 plus 10.90% of the excess NYS PTET taxable income over $25M.

 

How to Make the NYS PTET Tax Payments

  • All payments are to be paid online, through the entity’s NYS online tax account.
  • For 2021 only, no estimated tax payments are required. The full amount of the NYS PTET can be paid by the due date of the NYS PTET return, or March 15, 2022.  Underestimated tax penalties will not be imposed for 2021, as long as the NYS PTET is paid by the March 15, 2022 due date of the tax return.
  • The first 2021 estimated tax payment can be made by December 15, 2021. Please note that, as of now, NYS has not set up the capability of making such a payment, on its website.
  • Starting in 2022, NYS PTET estimated tax payments are due March 15, June 15, September 15, and December 15. Penalties will be imposed for the underpayment of NYS PTET estimated tax payments.
  • Again, please note that in order to get the deduction for NYS PTET taxes paid, NYS is basing this deduction on a CASH BASIS (even if the entity s on an accrual basis for income tax purposes). As a result, if no 2021 estimated tax payment is made by December 31, 2021, then there will be no deduction on the entity’s federal tax return, for 2021.  The deduction will have to be taken in 2022, if paid in 2022.
  • NOTE: NYS has stated that, even if electing for the NYS PTET, that 2021 personal NYS estimated tax payments still need to be paid, in full, as if the NYS PTET did not exist.

 

How to File the NYS PTET Tax Return

  • The return must be filed online.
  • 6-month extensions are allowed (filed online), but the tax must be fully paid in by the original due date of the return, to avoid penalties.
  • NO AMENDED NYS PTET TAX RETURNS ARE ALLOWED.

 

How Individuals Claim the NYS PTET Credit

  • Via Form IT-653 (Pass-Through Entity Tax Credit) attached to the individual’s NYS personal income tax return.
  • Qualifying trusts claim the credit on its NYS trust return only. The trust is not allowed to distribute the credit to its beneficiaries.
  • All individual taxpayers claiming the NYS PTET credit must file a NYS personal tax return.
  • If the amount of the PTET credit allowable for any taxable year exceeds the taxpayer’s tax due for that tax year, then the excess will be treated as an overpayment, to be credited to future years or to be refunded without interest.

 

 

WITHOUT NYS PTET ELECTION
2021 Taxable Income Received from Passthrough Entity $ 1, 000, 000. 00
Individual Federal Tax Rate (Assumed for this example) 37%
Individual Income Tax Due on Passthrough Income $ 370, 000, 000. 00
WITH NYS PTET ELECTION
2021 Taxable Income Received from Passthrough Entity $ 1, 000, 000. 00
NYS PTET Tax Paid At Entity Level (Assumed Rate) 6.85%
NYS PTET Tax (Refundable credit to the individual taxpayer) $ 68, 500. 00
2021 Taxable Income After Reduction for NYS PTET $ 931, 500. 00
Individual Federal Tax Rate (Assumed for this example) 37%
Individual Income Tax Due on Passthrough Income $ 344, 655. 00
Individual Tax Savings On Making NYS PTET Election $ 25, 345. 00