Pass-Through Entity Tax Information
What is PTET?
This is a new optional Pass-Through Entity Tax (PTET) for Partnerships and S-Corporations effective for tax years beginning on or after January 1, 2021. This PTET allows the business to pay the NY state tax as opposed to each member/partner paying the tax on their personal income tax return. In essence, this is New York’s way of helping taxpayers with businesses get around the federal SALT limitation. If you recall, the 2018 Tax Cuts and Jobs Act limited the State & Local Tax (SALT) deduction that we are allowed to take on our personal tax returns to $10,000. Many people in New York exceed this amount due to our high income and property taxes and now pay more in federal taxes due to this limitation.
Does the PTET sound promising?
There are many other factors to consider:
This would mostly benefit entities that have partners/members in NY only since we do not yet know how other states may abide by this. Also, the calculation for resident/non-resident is a bit complicated and would be more costly.
Only NY sourced income is considered in this calculation. Therefore, if a business earns money from other states, that income would not be part of this calculation which limits the tax savings.
The 2018 Tax Cuts & Jobs Act (TCJA) is slated to expire at the end of 2025 anyway. In addition, the TCJA is on the proposed chopping block before that date. If the act is done away with and the SALT cap is eliminated, then there is no need for the work around.
Although this PTET paid by the entity would reduce the income reported on Form K-1, this also means that the 20% QBI deduction will also be reduced by the lower income amount. In other words, the reduction to taxable income will not be as great as it sounds.
Estimated taxes will need to be paid by the entity for this tax, and, as of right now, have to be paid at the highest NY tax rate of 10.9%. Any taxpayer in a lower bracket will receive a credit when they file their tax return, but there will be a decrease to cash flow in the interim.
A separate tax return will need to be filed with NYS by March 15th each year to report this PTET amount.
The tax savings could be limited by the extra fees involved with paying an accountant to calculate the PTET and file the tax return.
Once an entity elects into the PTET in a given year, the election is irrevocable for that year.
Should you apply?
We see this tax savings as a benefit to high earning partnerships and S-Corps with income solely/mostly from NY whose partners/members all live in NY and have very high K-1 amounts. It would specifically benefit taxpayers with K-1s in the service industry whose taxable income exceeds the QBI threshold since these taxpayers already do not receive the 20% QBI deduction. Therefore, our initial projection is that a NY partner/member whose overall taxable income exceeds $426,000 (MFJ) or $215,000 (Single) may want to consider this. The PTET election for 2021 needs to be made online by October 15, 2021 and the tax payment would need to be made by December 31, 2021.
Here is a link for more information from NY regarding this tax: https://www.tax.ny.gov/bus/ptet/#:~:text=The%20PTET%20is%20an%20optional,or%20after%20January%201%2C%202021
In order to opt in to this tax, you would need to login to your NYS online business account: https://www.tax.ny.gov/online/ (If you don’t have an account, you would need to create one)