SALT Alert: New York State Pass-Through Entity Tax

Yesterday, the New York State (“NYS”) Department of Taxation and Finance (the “Department”) finally issued guidance on the NYS’s pass-through entity (“PTE”) tax that is available to eligible partnerships and S corporations for taxable years beginning on or after January 1, 2021. Technical Service Bureau Memorandum No. TSB-M-21(1)C, 08/25/2021.

By way of background, NYS, along with a growing number of other states, has enacted a PTE tax as a “work-around” to the federal $10,000 limitation on deducting state and local taxes (imposed by the 2017 Tax Cuts & Jobs Act) from an individual’s federal income tax return. The potential benefit to eligible shareholders, partners, and members is derived from the state tax being paid and deducted at the PTE level, allowing the individual owners to effectively receive an “above the line” deduction, which is not subject to the $10,000 limitation. At the individual level, the owner is entitled to a credit against the state’s personal income tax based on their share of the tax paid at the entity level. 

In November 2020, the IRS issued Notice 2020-75, which says they “intend to issue proposed regulations to clarify that State and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment.”

New York State PTE Tax

The Department’s memorandum answered numerous questions a PTE needs to take into consideration when deciding whether to elect into the NYS PTE tax regime. The key points include:

1. The election needs to be made online through the NYS’s portal, which means an online account for the business needs to be set up if one does not exist already.
   
   
2. The 2021 election is due by October 15, 2021 and is irrevocable. This is the same for fiscal year filers.
   
   
3. How to calculate the tax and how to allocate the NYS PTE tax credit to the owners.
   
   
4. In order to assure that the federal tax deduction for the PTE tax is available for 2021, the PTE should make an estimated tax payment no later than December 31, 2021. An online platform for a 2021 estimated NYS PTE tax payment will be available by December 15, 2021.
   
   
5. Regardless of whether an electing entity chooses to make an optional estimated tax payment per the above, NYS personal income tax estimated payments must be made for 2021 without any consideration for a NYS PTE tax credit at the individual level. Furthermore, the NYS personal income tax estimated payments are not considered prepayments of the PTE tax and cannot be applied to PTE tax liabilities.
   
   
6. Prior to 2021, NYS is on record that residents are NOT permitted a credit against the State’s personal income tax for the payment of another state’s PTE tax. HOWEVER, beginning in tax year 2021 with the enactment of the NYS PTE tax, residents should be entitled to a NYS credit for PTE taxes paid to other states.
   
   
7. Eligible shareholders, partners, and members receiving a NYS PTE tax credit must file an individual personal income tax return to claim the credit. The NYS PTE tax credit may not be claimed on Form IT-203-GR, Group Return for Nonresident Partners, or Form IT-203-S, Group Return for Nonresident Shareholders of New York S Corporations.
   
   

The decision to make a PTE tax election (whether in NYS or any other state with a similar tax regime) is typically not a simple decision. There are numerous considerations a PTE should evaluate prior to making any election. The following list is not all-inclusive but touches on many of the significant considerations that need to be evaluated:

• Election due date
• Estimated tax/nonresident withholding requirements
• Tax base for PTE tax
• Treatment of tiered entities
• State addbacks
• Credit on resident returns
• Federal deductibility of PTE tax with respect to portfolio income
• Credit on a composite return
• PTE tax credit
• Cash flow
• Cost/benefit analysis
  
  

Takeaways

Whether a PTE should elect a specific state’s PTE tax is very fact-specific. While there are answers to many of the above issues, there is also some uncertainty. We strongly advise any PTE’s considering making a PTE tax election to consult with their Citrin Cooperman advisor or reach out to any of the following State and Local Tax Practice professionals: David Seiden at dseiden@citrincooperman.com, Eugene Ruvere at eruvere@citrincooperman.com, Tom Walsh at twalsh@citrincooperman.com, or Jaime Reichardt at jreichardt@citrincooperman.com.