New Guidance and Election Application for Optional Pass-Through Entity Tax
On August 25, 2021, New York State released guidance regarding the New York State pass-through entity tax (PTET) election which allows owners of pass-through entities (PTE) to receive a federal deduction for the New York State income taxes paid by the PTE.
The PTET is a tax, based on the taxable income of the pass-through entity. The PTET paid by the entity reduces the taxable income passed-through to each individual partner/shareholder. Each partner/shareholder then receives a dollar-for-dollar refundable credit for their direct share of the PTE tax paid.
The PTET was enacted to circumvent the $10,000 state and local tax limitation on a shareholder or partner’s individual federal income tax return since the New York State tax paid by the PTE would not be subject to the $10,000 limitation.
For tax years beginning on or after January 1, 2021, the PTET election must be made through the entity's Business Online Services account on or before October 15, 2021.
For tax years beginning on or after January 1, 2022, the PTET election must be made through the entity's Business Online Services account on or before March 15 of that year, but no earlier than January 1.
Please note, this election must be made on an annual basis, and once the election is made, it is irrevocable for that year.
For 2021 only, no estimated tax payments are required by the PTE. However, a payment based on the PTE’s taxable income, must be remitted on or before March 15, 2022. Although the PTE tax is not due until March 15, 2022, any cash basis taxpayer will be required to pay the tax by December 31, 2021 in order to receive a deduction in 2021.
As a matter of further explanation, individual partners/shareholders are still required to make estimated tax payments for the 2021 tax year. As a result, a “double payment” situation arises in 2021 as payments are required at both the entity and individual level.
For tax years beginning on or after January 1, 2022, quarterly estimated taxes will be required by the PTE with any remaining tax liability due on or before March 15.
However, estimated taxes will no longer be required at the individual level, to the extent the taxes are being paid the PTE. As a result, the “double payment” situation only applies to the 2021 tax year.
The PTET election may result in significant tax savings for PTE, including both partnerships and S corporations. Please contact your tax professional at Dermody, Burke & Brown to further discuss if this election will be beneficial to you.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.