SALT Strategies

New York Pass-through Entity Tax Guidance – A Complex Roadmap for Those Considering Venturing Into New York’s PTET Highway

PTET memo 1 - New York Pass-through Entity Tax Guidance – A Complex Roadmap for Those Considering Venturing Into New York’s PTET Highway

Just in time for Labor Day, on August 25, 2021, New York State (NYS) issued Technical Memorandum TSB-M-21(1)C, (1)I, {“TSB”). The TSB is New York’s initial guidance in addressing the myriad of technical and procedural issues since New York adopted its elective Pass-through Entity Tax (PTET). The TSB provides comprehensive guidance on numerous issues arising from the State’s complex PTET provisions.

The TSB substantially re-affirms the analysis previously detailed in our earlier SALT Strategies posts with respect to State’s adoption of its PTET provisions in late April. (Our previous posts addressing the PTET are provided at the bottom of this article for your convenience.)

In this post, we will provide a comprehensive summary of the significant issues covered in the TSB inclusive of those previously covered in our early posts.

Significant PTET Issues Covered by the TSB

1. Electing the NYS PTET

Who may make the PTET Election?

Only an authorized person may make this election on behalf of an eligible partnership or S corporation. An authorized person for an S corporation is any officer, manager or shareholder who is authorized; for a partnership/LLC, it’s any member, partner or owner with authority to bind the entity.

An eligible partnership and an eligible S corporation may make an annual irrevocable PTET Election.

An eligible partnership is:

• Any partnership or limited liability company (LLC) treated as a partnership for New York and federal income tax purposes,
• That has a filing requirement under Tax Law § 658(c)(1); and
• Is not a publicly traded partnership.

A partnership is eligible to make the election even if it has partners that are not eligible for a PTET credit including, but not limited to, corporate partners.

An eligible S corporation is any Federal S corporation that has made an election to be taxed as an S corporation for New York State tax purposes (including an LLC treated as an S corporation for New York and federal income tax purposes) as defined by Tax Law § 208(1-A) that is subject to the fixed dollar minimum tax under Tax Law § 209.

Election Period

A PTET Election may be made for tax years beginning on or after January 1, 2021.

An electing entity that is a calendar-year taxpayer for federal purposes must use a calendar-year basis to elect, file, and pay PTET. An electing entity that is a fiscal-year taxpayer must elect, file, and pay PTET for the calendar year in which its fiscal year ends.

Election – When to Make

For tax years beginning on or after January 1, 2021 (i.e., the 2021 tax year), an election may be made online up until October 15, 2021.

For tax years beginning on or after January 1, 2022, the annual election may be made online on or after January 1st but no later than March 15th of the year for which the election will cover.

The PTET Election – Online Only Through PTE’s Business Online Services Account

The TSB indicates that: “For tax years beginning on or after January 1, 2021, an authorized person can opt in to PTET on behalf of an eligible entity through the entity’s Business Online Services account, now through October 15, 2021.” If the entity does not have a Business Online Services account, the authorized person will need to create one.

2. PTET Taxable Income Calculations – General

The TSB indicates that the PTET is based on the Taxable Income of the electing PTE. The PTET “Taxable Income includes all income, gain, loss, or deduction of an electing entity that flows through to a direct partner, member, or shareholder for New York personal income tax purposes.”

A direct member, partner, or shareholder is any member, partner, or shareholder that is issued a federal Schedule K-1 by the electing entity based on the member’s, partner’s or shareholder’s direct ownership interest in the electing entity. A federal Schedule K-1 issued to an entity that is disregarded for tax purposes, such as a single member limited liability company, is treated as if issued directly to the individuals or entities that include the disregarded entity’s activity on their income tax returns.

Different PTET Taxable Income for Electing Partnerships Versus S Corporations

As discussed in our June 4, 2021 post, there are different PTET Taxable Income calculations for electing Partnerships/LLCs versus electing S corporations.

S Corporations

An electing New York S corporation calculates its PTE taxable income by aggregating amounts of income, gain, loss or deduction that flow through for New York income tax purposes to direct members or shareholders who are taxable under Article 22. Aggregated income and gain is reduced by any losses or deductions without regard to any limitations that would be imposed on the member’s or shareholder’s federal and NYS personal income tax returns. The electing S corporation must then apportion this net amount of taxable income to New York based on the apportionment rules of Article 9-A included in Tax Law § 210-A.

Partnerships and LLCs – Resident Pools and Non-Resident Pools

The TSB states that prior to computing its PTE taxable income, an electing partnership is required to classify all direct members or partners that are taxable under Article 22 as a resident or nonresident of New York.

An electing partnership must not include in its PTE taxable income any amounts of income, gain, loss, or deduction that flow through to a direct partner that is a partnership or an entity not subject to tax under Article 22, even if the income is ultimately taxable to a partner under Article 22 through tiered partnerships. Two important observations:

  1. Only members or partners that are taxable under Article 22 will be included in the calculation of the partnership’s PTET Taxable income. Therefore electing partnership’s Taxable Income allocable to other PTE and Corporations will not be included in the electing partnership’s PTET Taxable Income.
  2. Members or partners may not be classified as part-year residents for PTET.

Note: This PTE taxable income calculation applies to partners or members who do not have a special allocation of profits that differs from their allocation of losses. If a special allocation is present, an electing partnership must take these allocations into account when computing each pool.

Resident PTE taxable income pool: The Partnership/LLC PTE must aggregate any amounts of income and gain that flow through to resident individual members or partners and offset that amount by any losses or deductions that flow through to resident individual members or partners, without regard for any limitations that would be imposed on the member’s or partner’s federal and NYS personal income tax returns.

Nonresident PTE taxable income pool: The Partnership/LLC must aggregate any amounts of income and gain derived from or connected with New York sources that flow through to nonresident individual members or partners and reduce that amount by any losses or deductions derived from or connected with New York sources that flow through to nonresident individual members or partners, without regard for any limitations that would be imposed on the member’s or partner’s federal and NYS personal income tax returns.

The following TSB example is illustrative of the potential complexities inherent in the State’s calculation of electing partnership’s PTET Taxable Income:

Example: An electing partnership has New York sourced ordinary income of $2 million flowing to nonresidents and ordinary income of $2 million and a capital loss of $1 million flowing to residents for the tax year. The nonresident PTE taxable income pool of the partnership would be $2 million, and the resident PTE taxable income pool of the partnership would be $1 million ($2 million ordinary income less $ 1 million capital loss). The PTE taxable income for the partnership would be $3 million ($2 million nonresident PTE taxable income plus $1 million resident PTE taxable income).

The TSB sets forth several additional examples to illustrate the calculation of PTET Taxable Income for electing partnerships. A review of these examples is highly recommended as required due diligence analysis of whether a partnership should elect to be subject to the NY PTET.

3. PTET Graduated Tax Rates

For each tax year beginning on or after January 1, 2021, PTET is imposed on each electing entity’s PTE taxable income. This tax is in addition to any other taxes imposed on the entity under the Tax Law.

Graduated Rates That Parallel New York State’s New Higher Personal Income Tax Rates

As set forth in the TSB, the PTET will be determined at the following rates:

• Income not over $2 million – 6.85%;
• Income over $2 million but not over $5 million – $137,000 plus 9.65% of the excess over $2 million;
• Income over $5 million but not over $25 million – $426,500 plus 10.30% of excess over $5 million;
• Income over $25 million – $2,486,500 plus 10.90% of the excess over $25 million.

4. Estimated Tax Payments by the PTE for PTET

For PTET Tax Year 2021

An electing entity is not required to make any estimated tax payments for PTET. Such PTEs electing the NYS PTET may choose to make optional online estimated tax payments prior to December 31, 2021, which may be particularly beneficial in the case of a cash basis electing entity. An online estimated tax application for PTET will be available by December 15, 2021.

The US Treasury Department has indicated that they will issue regulations on the subject of state pass through entity taxes . As of now, they have indicated that such taxes that meet several conditions will result in tax deductions for the pass through entities. We will be closely monitoring any Treasury activity on this topic.

For PTET Tax Years Beginning on or After January 1, 2022

An electing entity is required to pay estimated tax on the amount of PTET calculated for the current taxable year using the online application. Estimated payments calculated at 25% of the required annual payment are due on or before March 15, June 15, September 15, and December 15 in the calendar year prior to the year in which the due date of the PTET return falls. If the due date of the estimated payment falls on a Saturday, Sunday, or legal holiday, the payment is due on the next business day. The required annual payment is the lesser of: a) 90% of the PTET for the current year or b) 100% of the PTET reported for the preceding PTET tax year.

If the electing entity did not make the election to be subject to the PTET for the preceding PTET year, the required annual estimated tax payment is 90% of the PTET required to be reported on the return for the taxable year.

PTET estimated payments will only be applied to the PTET liability. In addition, PTET tax payments may not be transferred between related entities or individuals.

Please note: As set forth in our June 9, 2021 post, the election by the PTE to pay PTET tax does not relieve the PTET owner from its obligation to remit timely and proper estimated tax payments to New York State.

5. PTET Annual Returns – Special Rule for Fiscal Year End Electing PTEs

On or before March 15, an electing entity must file an annual PTET return using the online return application to report the information required under Article 24-A for the PTET taxable year. All PTET tax returns are filed on a calendar-year basis.

Please note: The TSB indicates “a fiscal-year taxpayer does not re-compute its income on a calendar-year basis. Instead, its Pass-through Entity (PTE) taxable income must be computed for the fiscal year that ends within the PTET calendar year.” Therefore, the PTET return for an electing entity with a fiscal year is due on or before March 15 following the close of the calendar year in which its fiscal year ends. The TSB provides the following example.

Example: A partnership’s fiscal year is March 1, 2021 through February 28, 2022. Although the partnership reports its income for Article 22 purposes on a 2021 IT-204, Partnership Return, the partnership will make its PTET election for the 2022 PTET taxable year by March 15, 2022 and file its PTET return by March 15, 2023.

6. Calculation for Tiered PTE Structures

The TSB clarifies an issue with respect to Tiered PTE structures. An eligible PTE that has PTE owners, must exclude from its NYS PTET calculation, the portion of its income allocable to all PTE owners. The TSB states “A partnership must not include in its PTE taxable income any amounts of income, gain, loss, or deduction that flow through to a direct partner that is a partnership or an entity not subject to tax under Article 22, even if the income is ultimately taxable to a partner under Article 22 through tiered partnerships.” A direct partner that is itself an eligible partnership for the PTET may make its own PTET election for its tax year.

7. Additional Guidance

The TSB also introduces the form, Form IT-653, Pass-Through Entity Tax Credit, for claiming the PTET credit.

The memorandum also provides guidance with respect to the procedures for owners of an electing PTE to claim its share of the PTET credit.

Additionally, the TSB provides more information with respect to PTEs that have Trusts as owners. It states:
“A trust, other than a trust that is disregarded for tax purposes, that is a direct partner, member, or shareholder in an electing entity is allowed a PTET credit on the trust’s personal income tax return, but it is not permitted to distribute any PTET credit it receives to its beneficiaries.”

A PTE owner claiming the PTET credit must include an addition modification in determining its New York taxable income.

Finally, the TSB indicates that an online estimated tax application for PTET will be available by December 15, 2021.

PTET TSB Takeaway

The TSB further sets forth the complexities, highly fact sensitive required analysis and potential unexpected ramifications arising from an eligible pass through entity decision to pursue the “benefits” of electing the NY PTET. Such concerns are especially applicable to partnerships that may be considering electing to be subject to NY’s PTET.

What’s the “TAKE AWAY” – This TSB amplifies our concerns stated in our June 4, 2021 post:

“The NYS PTET continues to present significant technical as well implementation issues. It is increasing apparent that PTE owners and their tax advisors considering the New York PTET, as with the New Jersey BAIT, should tread carefully and thoroughly analyze the benefits as well as the consequences of making a PTET election. Their analysis will be sensitive as well as dependent on each PTE’s type, the PTE owners’ New York resident status, and in the case of S corporations, the PTE’s New York BAP.”

If you have any questions or concerns regarding the PTET, please contact your MWE professional or call us at 516-747-2000.


 

Related posts:

  1. April 20, 2021: Batter up – The NYS 2021-22 Budget – Is It a Home Run or Strike Out for New York State Taxpayers and Businesses?
  2. June 4, 2021: New York’s Pass-through Entity Tax – Potential Lower Federal Tax Benefits to S Corporation Shareholders
  3. June 9, 2021: Owners of Pass-Through Entities Electing the NY PTE Tax – Your NY Personal Estimated Tax Payments Must Be Calculated Without a PTET Credit

Read: Baker Tilly Expands in New York with Acquisition of Margolin, Winer & Evens