The Focus - Our Tax E-Newsletter
PTET Updates - It's Not Too Late to Elect for 2022
In 2021, New York State introduced the pass-through entity tax (PTET), which allowed owners of electing pass-through entities to circumvent the $10,000 state and local tax deduction limitation on their individual tax returns. As a result, many shareholders and partners of the entities which elected PTET enjoyed significant tax savings. If your pass-through entity missed out on the 2021 PTET, have no fear - it is not too late to elect for 2022: the 2022 election deadline has been extended to September 15, 2022.
Although 2022 may not be every taxpayer's first time around the block with the PTET, the 2023 NYS Budget introduced numerous changes for tax years beginning on or after January 1, 2022. If your entity has elected, or is considering electing the PTET, it is imperative to understand the following in order to maximize tax savings.
Changes for S Corporations
In 2021, the PTET for S Corporations was based only on New York sourced income. This meant that the federal deduction for the PTET was limited, since it was not calculated using the entity's entire net income. This same rule did not apply to partnerships that elected PTET in 2021; partnerships taxable base previously included income sourced from all states.
In order to level the playing field, the 2023 NYS Budget established two types of S Corporation certifications for purposes of the PTET calculation. The PTET tax base differs depending on the type of certification an entity elects. The two types of S Corporations for PTET are:
- The "Electing Resident S Corporation" - the entity certifies that all shareholders are NY residents.
- The "Electing Standard S Corporation" - the entity has at least one shareholders that is not a NY resident.
S Corporations taking advantage of the PTET will now have to make an annual certification based on the above types of S Corporations. This certification will be made concurrent with the PTET election. However, for the 2022 tax year, the certification deadline has been extended until March 15, 2023. It is also important to note that the certification is irrevocable once made. The NYS Tax Department will be releasing further guidance regarding the steps required to make the annual certification.
Although at first glance this certification may appear to be another cumbersome hoop to jump through, becoming an "Electing Resident S Corporation" is worthwhile if the entity qualifies. S Corporations who certify that all of their shareholders are NY residents (thus becoming an "Electing Resident S Corporation") receive a larger tax benefit from the PTET. Essentially, "Electing Resident S Corporations" expand their PTET tax base to include all income, regardless of the state it is sourced from. In turn, this certification maximizes the PTET liability, as well as the federal tax benefit that is passed through to the owners' personal tax returns.
In the case of the "Electing Standard S Corporation", the PTET calculation follows the same rules as 2021; the PTET liability and federal benefit is based solely on NY sourced income. Therefore, if all your shareholders are NY residents, it is imperative that the "Electing Resident S Corporation" certification is made in order to maximize tax savings.
Election & Certification Deadlines
As previously mentioned, entities can still elect the PTET for the 2022 tax year:
- The election deadline has been extended to September 15, 2022.
- For electing S Corporations, the 2022 certification deadline has been extended to March 15, 2023.
Beginning with the 2023 tax year, the election and certification due dates will return to the originally intended deadline of March 15.
After making the PTET election, the entity is required to pay in estimated tax payments.
The Budget Bill also provided some relief for 2022 estimates. Estimates are required to be made as follows:
- Election made prior to or on March 15: First quarter estimates were due on March 15. Second quarter estimates are due on June 15, 2022, and should be equal to 25% of the required annual payment.
- Election made between March 16 and June 14, 2022: an estimate equal to 25% of the required annual payment must be made with the election. A second quarter estimate of 25% is also due on June 15, 2022.
- Election made between June 15 and September 14, 2022: an estimate equal to 50% of the required annual payment must be made with the election.
All entities electing the 2022 PTET must have 75% of the required 2022 annual payment made by September 15, 2022, and 100% of the required 2022 annual payment made by December 15, 2022 to avoid interest and penalties.
Beginning with the 2023 tax year, estimated payments will also return to the originally intended due dates of March 15th, June 15th, September 15th, and December 15th.
Introduction of the NYC PTET
In addition to the aforementioned changes to the NYS PTET, the 2023 NYS Budget also created the New York City PTET. The NYC PTET is effective for tax years beginning on or after January 1, 2023 and is imposed at a flat rate of 3.876%.
The NYC PTET may be elected by pass-through entities that have elected the New York PTET and meet the following criteria:
- Partnerships: at least one partner is a New York City resident.
- S Corporations: all shareholders must be New York City residents.
The election due date and required estimates follow the New York PTET for the 2023 tax year.
The above PTET elections, certifications, and estimated tax payments may result in significant tax savings. Please contact your tax professional at Dermody, Burke & Brown to further discuss the PTET and if it would be beneficial for you. If you have any questions regarding the PTET updates, please contact your tax advisor at Dermody, Burke & Brown.
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.