The Tax Cuts and Jobs Act, limited taxpayers’ itemized deduction for state and local income and property taxes (“SALT”) to $10,000 per tax year. As residents and business became outraged, many states tried to create workarounds so residents could deduct state and local taxes in excess of the federal itemized deduction limit. Due to a lack of success, some states are now looking at combining an entity-level tax with a corresponding personal income tax credit to effectively receive the same tax dollars but bypassing the $10,000 SALT limitation.
Late last year, the IRS issued a notice which allowed the deductibility of the entity-level tax in calculating flow-through income of the entity owner, blessing this version of the SALT deduction workaround. New York State’s new budget for 2022 included an elective Pass-Through Entity Tax (PTE) and a corresponding personal income tax credit regime, which will allow NYS taxpayers to avoid some of the impact of the SALT limit.
Who is Eligible?
Any entity classified as a partnership or S corporation for Federal and New York State income tax purposes can elect to pay an entity-level tax on its income at graduated rates that correspond to New York State’s personal income tax rates. The PTE tax election is not applicable to sole-proprietors or disregarded single member limited liability companies.
What is the Benefit?
By paying the PTE tax, the direct partners, members or shareholders of an electing PTE will receive a refundable credit against their New York personal income tax, generally in proportion to their ownership in the entity. Residents of New York can take a credit against their personal income tax for any PTE-type tax paid to other states, within certain parameters.
When does this go into effect?
For tax years beginning January 1, 2021, and before January 1, 2022, the election into the PTE tax/credit opportunity must be made on or before October 15, 2021. The election must be made online and must be made by an authorized person within the entity and not by the entity’s CPA. It is irrevocable.
Future elections must be made annually by March 15th, and are similarly irrevocable. For the tax year 2021, entities are not required to make estimated tax payments, but, to be eligible for the deduction in 2021, the payment of the tax must be made before December 31, 2021. The payment will have to be made electronically through a soon-to-be-created payment portal on the NYS Tax Department website.
The rules require that for the 2021 calendar year, the owners of an electing entity are required to continue to pay their personal income tax estimates as if the PTE tax and its personal tax credit benefits do not exist.
CONTACT US: For some entities, the calculations will be more complicated than for others. Do not attempt to navigate these waters on your own, the guidance does not yet address all of the issues that will arise. It is important for owners of eligible entities to immediately contact their Fuoco Group tax professionals to examine the impact of making a PTE tax election and to be sure it is done on a timely basis. Questions can be sent to CPA@Fuoco.com.
New York State’s Technical Memorandum with detailed information regarding the PTE Tax, the election requirement, the calculation and payment of the tax and the calculation and reporting of the personal income tax credit can be found here: https://www.tax.ny.gov/pdf/memos/ptet/m21-1c-1i.pdf
