September 17, 2021
What is a Pass-through Entity Tax?
A pass-through entity tax (PTET) enables the members of the eligible partnership or S corporation to make estimated tax payments to lower the federal taxable income that flows through the entity onto the individuals tax returns.
Who is eligible?
Public partnerships other than publicly traded partnerships, including a limited liability company treated as a partnership for federal income tax purposes are eligible entities. Also New York S corporations, including limited liability companies treated as an S corporation for federal income tax purposes that is otherwise eligible.
What are the benefits of the PTET?
The benefit of the tax is individuals now have the ability to work around that State and Local Tax (SALT) Cap of $10,000. When the Tax Cuts and Jobs act was signed into law in 2018, individual tax payers were only able to deduct up to $10,000 in State and Local Taxes. The PTE tax enables states to collect tax revenue in a timely manner and individuals will be able to reduce their federal taxable income from the entity by the amount of tax paid equal to the individuals share in entity.
How does PTET affect individuals on their Federal Return?
Members of the electing entity will have their federal taxable income be reduced by the amount of PTE tax paid. These estimated payments allow the entity to lower its federal taxable income resulting in less tax having to be paid on the entity’s income.
How does the PTET affect individuals on their NYS return?
The PTET will have to be added back on the individual’s personal NYS return as an adjustment to the individuals NYS taxable income. However, individuals will have the opportunity to claim a tax credit for the PTE tax credit for the amount equal to the individual’s share of the tax paid.
How do I elect to pay the PTET?
Entities who want to make the election can do so online on the NYS Department of Taxation and Finance website. Once on the site, the below description details how to make the election.
To opt-in to the PTET:
1) Log in to (or create) the eligible entity’s Business Online Services account.
2) Select the ≡ Services menu in the upper-left corner of the Account Summary homepage.
3) Select Corporation tax or Partnership tax, then choose PTET web file from the expanded menu.
4) On the Form Selection page, choose Pass-Through Entity Tax (PTET) Annual Election
How do I pay the PTET?
Eligible partnerships or S corporations who make an irrevocable election to pay the PTET become required to pay estimated tax payments.
For tax year 2021, estimated tax payments are not required.
How do the Estimated Tax Payments work?
Four quarterly estimated payments must be made for each quarter of the tax year. Total payments should be the lesser of 90% of the current-year tax or 100% of the prior-year tax. Fiscal year filers must adhere to the same payment due dates as calendar year filers.
What are the Tax Rates of the PTET?
The following are the tax rates that are based on the total taxable income of the PTE:
Pass-through entity taxable income
Not Over $2 Million.
Over $2 million but not over $5 million.
$137,000 plus 9.65% of the excess over $2 million
Over $5 million but not over $25 million.
$426,500 plus 10.30% of the excess over $5 million
Over $25 million.
$2,486,500 plus 10.90% of the excess over $25 million.
What is determined to be the entity’s New York State Taxable Income?
A partnership’s NYS taxable income is the sum of the entity’s adjusted net income (all items of income gain, loss, or deduction) allocated to the state to the extent included in a nonresident partner’s taxable income and adjusted net income to the extent included in a resident partner’s taxable income.
For a NYS S corporation, taxable income includes “all items of income, gain, loss or deduction derived from or connected with New York Sources to the extent they would be included in the taxable income of a shareholder subject to tax under Article 22” [NYS Tax Section 860 (h)].
What other requirements do I have to satisfy for PTET?
When an entity elects to pay the PTET tax, they are required to file an annual PTE tax return. The annual return is due on March 15th or September 15th (with a six-month extension).
What are the disadvantages of the PTET?
One item to consider when making the election to pay the PTE tax is the impact on out-of-state shareholders or partners.
New York residents can claim a credit for entity-level taxes that are paid to another state or that are “substantially similar.”
What New York State identifies as substantially similar has not been interpreted as of now. Partners or shareholders that reside in states where a PTET is not available will not have the opportunity to take the credit on their state return.
For reference, here are states that have their own version of a Pass-Through Entity Tax:
Alabama, Arkansas, Colorado, Connecticut, Georgia, Idaho, Louisiana, Maryland, New Jersey, New York, Oklahoma, Rhode Island, South Carolina, and Wisconsin.
Is the PTET right for me?
The PTET benefits individuals that are part of the electing entity. Electing to pay the PTET will result in the Federal Taxable income of the entity being lower than if not electing to pay the tax. Individuals of the entity will then report Federal Taxable Income that is decreased by the PTET paid. Individuals, will also be able to take a credit against the portion of the PTET that they pay for their NYS personal income tax return.
If the credit amount results in an overpayment of your state tax liability, then individuals can receive a refund of the overpayment interest free.
Keith Boyer, CPA, CFP