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New York’s 2021-2022 Budget Act included an elective pass-through entity tax (PTET) that was effective for taxable years beginning January 1, 2021. The PTET gives New York individual taxpayers a work-around to the $10,000 annual limitation on the deductibility of state and local taxes on their Federal tax return. This benefit is accomplished by treating the PTET paid on the entity’s New York pass-through entity income (PTE Income) as a qualified business expense for the pass-through entity. This means the pass-through entity gets to take an unlimited deduction on its business tax return for the PTET paid. If PTET is not paid by the pass-through entity, the individual partners would instead include the amount of taxes paid to NY on this PTET Income as an itemized deduction, which would be subject to the state and local deduction cap. Further, this deduction at the pass-through entity level reduces the income that passes through and must be recognized by the members of the pass-through entity on their individual Federal tax returns.
A member of the pass-through entity then receives a New York credit equal to their pro rata share of the PTET paid, which they can then claim on their New York individual tax return. As such, no additional tax is due on the member’s pro rata share of the entity’s New York PTE Income (i.e., the PTET does not cause double taxation in New York for the members). The result for members is a benefit at the Federal tax level equal to the individual’s share of the PTET tax paid at the individual’s statutory tax rate, as well as a potential incremental benefit at the New York level depending on the individual’s state income tax profile.
2022 Tax Implications: For tax year 2022, taxpayers had to make an irrevocable election to opt into this taxing regime by March 15, 2022. However, Governor Kathy Hochul just signed S8948 into law, which extends the election due date for the current year to September 15, 2022. For the election to be valid, a payment of 50% of the required annual payment must be made with the election. So if you have not yet made the election for 2022, you may opt in to the New York State PTET using the Pass-Through Entity Tax Annual Election application. If you need assistance with this process or calculating your required estimated payment, please do not hesitate to reach out to our office.
NYC Note: Legislation amending the New York City pass-through entity tax (NYC PTET) has passed both houses of the NYS Legislature. If this legislation is enacted into law and you want to opt in to the NYC PTET for 2022, you must first have opted in to the New York State PTET by the September 15, 2022, election deadline.