New York Eases Tax Burden of Partners of Partnerships and Shareholders of S Corps
The enactment of the Tax Cuts and Jobs Act had foreseeable and unfortunate consequences for New York State individuals. The act lowered the state and local tax deduction to an annual aggregate of $10,000 (“SALT limitation”) for individual taxpayers. For New Yorkers, this limitation can result in a significant increase in federal income tax liability.
On April 19, 2021, New York State Gov. Andrew Cuomo signed the state’s 2021-2022 Budget Bill, which contains a significant tax measure under Article 24-A to offset the effects of the SALT limitation: an elective pass-through entity tax (“PTET”). Qualifying entities can provide their individual owners a legal way to circumvent the SALT limitation by being able to fully deduct their New York State income taxes. The election is for tax years beginning on or after January 1, 2021.
The PTET is available to entities classified as partnerships or S corporations for Federal and New York State income tax purposes. For example, the PTEP is available for private equity firms and hedge funds as they are typically formed as partnerships. The PTET allows a pass-through entity to pay a graduated income tax at rates which mirror the New York State personal income tax rates (ranging from 6.85% to 10.90% depending on the amount of the pass-through entity’s taxable income). An electing partnership’s pass-through entity taxable income includes its taxable income allocable to New York resident individual partners and New York source income allocable to non-New York resident individual partners. For electing S corporations, pass-through entity taxable income includes only the income derived from or connected to New York sources
The amount of the PTET paid by the pass-through entity is deductible by it for federal income tax purposes as a business expense and creditable by its individual partners (to the extent of their respective allocable shares thereof) against their respective New York State income tax liability, and is refundable to the extent in excess of the respective individual’s New York state income tax.
The PTET election is made annually and must be made by the due date of the first estimated payment of the tax; provided, however, the election for calendar year 2021 must be made by October 15, 2021. Once the election is made, it is irrevocable for the calendar year. The new law grants the New York State Tax Commissioner (the “Commissioner”) discretion to extend the election period. The PTET must be paid by electing partnerships, limited liability companies or S corporations in four equal installments in the calendar year prior to the due date of the required return. Except with respect to calendar year 2021, the estimated tax payment dates are March 15, June 15, September 15 and December 15. With respect to calendar year 2021, an electing entity is not required to make estimated payments for taxable year 2021.
Returns for the PTET must be filed on or before March 15th following the close of the taxable year. The return must include a “certification of eligibility” by an authorized individual of the electing entity stating that (1) a timely, valid election was made and (2) all statements are true. Additionally, the return must identify all partners, members, or shareholders of the electing entity eligible to receive credit. Once filed, the returns may not be amended without the consent of the Commissioner.
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