New York State has adopted an optional pass-through entity tax (PTET) for partnerships and S corporations. This type of tax has been enacted in other states as a response to the $10,000 state and local tax (SALT) itemized deduction limitation.
PTET is imposed on the business entity, which allows pass-through entities to deduct their state income taxes in full without the $10,000 limitation that applies to individual taxpayers. A partner or shareholder is entitled to a dollar-for-dollar credit against New York personal income tax for their share of PTET paid at the entity-level.
Eligible partnerships and S corporations may elect to pay PTET 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 an annual basis and is irrevocable. For tax years beginning on or after January 1, 2021, the election must be made no later than October 15, 2021. For tax years beginning on or after January 1, 2022, the annual election may be made online on or after January 1, 2022 but no later than March 15, 2022.
For tax years beginning on or after January 1, 2021, the tax rates are graduated based on the business entity’s taxable income:
- 6.85% of income not over $2 million
- $137,000 plus 9.65% of the excess over $2 million but not over $5 million
- $426,500 plus 10.3% of the excess over $5 million but not over $25 million
- $2,486,500 plus 10.9% of the excess over $25 million
Electing pass-through entities generally must make quarterly estimated payments based on their expected income. For 2021, such payments are not required, although payment of the PTET would generally be necessary to be deductible on the entity’s 2021 federal income tax return. In addition, for 2021, partners or shareholders must continue to make estimated payments calculated as if they were not entitled to the PTET credit.
With New York’s 2021 PTET election due on October 15, 2021, eligible pass-through entities should consider whether their partners or shareholders may benefit from electing into the new tax. Please contact us at 716-854-5034 or info@bspcpa.com if you have any further questions.