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Should You Pass Through NY’s New Elective PTE Tax?

  • New York has joined several other states in establishing a pass-through entity tax to protect businesses from double taxation
  • What is the PTE tax and why would a business choose to elect or forgo it?

Background of the PTE Tax

In 2017, Trump’s Tax Cuts and Jobs Acts (TCJA) established a cap on itemized deductions for the tax years 2018 – 2025, limiting individuals to a $10K annual SALT tax deduction. Several states, in order to circumvent the limitations of this TCJA provision, established state-level income taxes on pass-through entities. The PTE tax (Pass-Through Entity tax) serves to protect a state’s residents from potentially higher federal taxes that may result from the TCJA’s $10K deduction cap.

Typically, pass-through entities are not subject to entity-level taxes, such as the corporate income tax, because their profits are indicated on their owners’ or members’ individual tax returns through a Schedule K-1 Form. When a pass-through entity is taxed, less money “passes through” the entity to its owners, ultimately lowering the owners’ federal income tax liabilities.

In November 2020, after much uncertainty regarding the deductibility of state-level PTE taxes, the IRS declared that such taxes are deductible and not subject to the $10K SALT cap.

New York’s Elective PTE Tax

The NYS budget for the fiscal year 2022, signed in mid-April, created an elective PTE tax for the state. That’s right—a tax you can “choose” to pay!

What Are The Considerations/Benefits?

Owners might elect for the PTE tax in favor of lowering their federal tax liabilities. However, if a pass-through entity has owners who are not NYS taxpayers, they should consider whether the PTE deductibility is creditable to their out-of-state owners.

How and When to Elect for NYS

The NYS Department of Taxation and Finance has yet to release official guidance regarding election procedures. In the coming months, the agency will likely make available an informational webpage and develop an election form.

Elections must be made by an individual partner for partnerships and by a corporate officer, shareholder, or manager for S-corporations.

Pass-through entities in NYS must elect the new PTE tax by the following deadlines:

  • 2021 Tax Year: October 15, 2021
  • 2022 Tax Year & After: No later than the first estimated tax payment date (typically, March 15)

Talk to your tax advisors at DSJ to decide the best course of action for your business. Call us at 516-541-6549 and visit our website for more news and information.

 
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