In April, former NY Governor Andrew Cuomo signed legislation creating New York State’s version of a Pass-Through Entity Tax (PTET). Prior to this, New Yorkers were limited in the amount of state and local taxes (SALT) they could deduct, with a deduction “cap” maxing out at $10,000. To protect their residents from a potential federal tax increase, New York’s PTET is ready to be introduced.
What is the NY State PTE?
The NY state PTET is an optional tax for Partnerships and S corporations, which allows them to limit income tax liability for years beginning on or after New Year’s Day 2021. This new elective tax is now acting as a workaround for the federal cap on State and Local Tax deductions. Unfortunately, Federal Corporations and Single-Member LLCs in New York will not qualify, and once an entity elects to enter into the PTE tax, it is irrevocable for the year.
The optional PTE tax permits eligible recipients to pay state income taxes at the entity level allowing them to be fully deducted for Federal tax purposes. This is very helpful in reducing the burden of State and Local income taxes as it shifts liability from individual owners towards their pass-through entities.
When are the Payments Due?
No PTE taxes will be due for the current tax year only as the PTE payment forms have not yet been released. Payments will not need to be made until March of 2022. Since New York State may not be getting PTE payments until 2022, they are requiring Partner-level and Shareholder-level estimated payments for the time being.
What Businesses Should Opt. into this Tax?
Although every entity has a different situation, it is safe to say that entities with resident partners and mostly New York sourced income are the main candidates for this PTE. It may be harder for Businesses with out of State partners to offset external taxes with the New York State Credit. It is unknown if states other than New York would provide a credit for the PTE, which is why partnerships with out-of-resident partners may not want to opt into this tax. Investment partnerships or entities that only hold investment assets should certainly be considering opting for this tax, but it is unclear if the IRS would allow a deduction for a Partnership that is taxed in New York only based on Portfolio income.
This new tax in New York has the potential to benefit many resident taxpayers. New Yorkers are now able to work around the potential increase in federal taxes that is always looming in the shadows.