Jun 27 New York Amends PTET Tax and Implements New York City PTET Election
The deadline to make the revised New York State (“NYS”) pass-through entity tax (“PTET”) election and remit estimated tax due is quickly approaching. Generally, the due date for the election and estimated payment is March 15 of each tax year; however, and only for tax year 2022, NYS has extended that deadline to September 15, 2022 (see S.B. 8948). The tax alert below explains why the deadline has been extended for tax year 2022.
On April 9th, New York Governor, Kathy Hochul, signed tax legislation as part of the State Fiscal Year 2023 budget bill. The bill amends the state’s PTET to define a new class of S corporations and excludes PTET from the definition of “income taxes” for purposes of the add-back to state taxable income for personal income taxes. In addition, the bill implements a New York City (“NYC”) PTET election, the first U.S. local jurisdiction to offer such an election.
Amendments to NYS PTET for S Corporations
Effective for tax years beginning on or after January 1, 2022, a newly defined class of S corporation is implemented for the PTET election. The original PTET legislation, enacted in 2021 and effective for tax years beginning on or after January 1, 2021, allowed one class for the “electing S corporation,” which disregarded the residency status of its shareholders. The bill expands the definition of an electing S corporation to include an “electing standard S corporation,” as well as an “electing resident S corporation.”
The “electing standard S corporation” applies the legacy rules in that it ignores residency status and requires PTET to be computed post-apportionment for each shareholder. The change of interest relates to the newly created class, “electing resident S corporation.”
To qualify for the “electing resident S corporation” status for the state PTET regime, the S corporation must “certify” at the time of the election that all its shareholders are residents of NYS. In certifying the S corporation, the entity is allowed to calculate the shareholder’s PTET bases under the electing resident S corporation rules, pre-apportionment.
The PTET bases for an electing resident S corporation is the sum of all items of income, gain, losses, or deductions, to the extent that these items would be included in the shareholder’s NYS personal income tax (i.e., from all sources or pre-apportionment). This newly defined class and calculation of PTET may result in a greater PTET liability for the electing S corporation, thus creating a larger federal state tax deduction and, consequently, a larger (i.e., more favorable) NYS PTET credit for the resident shareholders.
The “electing standard S corporation” is a corporation that has both resident and non-resident shareholders. The S corporation will continue to compute the NYS PTET bases using the sum of all items of income, gain, losses, or deductions, derived from New York state sources (i.e., post-apportionment) for all shareholders.
An item to note – if an electing resident S corporation does not certify that the shareholders are NYS residents, by default, it will be treated as an “electing standard S corporation.”
The amendment also adds a new statute that addresses the PTET deduction that provides that the term “income taxes” in the case of a partner, member, or shareholder of an electing partnership or electing S corporation does not include the PTET to the extent it is added back under the PTET deduction add-back provision.
The legislation also provides that the term “income taxes” does not include other state pass-through entity taxes that are substantially similar to the NYS PTET to the extent otherwise added back under the operative provision. Of note is that this amendment is effective retroactively to tax years beginning on or after January 1, 2021. This amendment intends to clarify that there is no “double add-back” at the individual level relating to the PTET (under the old law, taxpayers were required to add back PTET taxes to their NYS taxable base).
NYC PTET Election
Effective for tax years beginning on or after January 1, 2023, NYC will have an elective PTET election, similar to the NYS PTET, with some differences. This election is made by the due date of the first estimated payment.
The NYC PTET election is irrevocable and may be made by an “eligible city partnership” or an “eligible city resident S corporation.” An “eligible city partnership” is a partnership where at least one partner or member is a resident of NYC. An “eligible city resident S corporation” is any New York corporation with only city resident individual shareholders. Either eligible partnership or S corporation may make the NYC PTET election congruent with the NYS PTET election.
The NYC PTET is imposed at a flat rate of 3.876%. The bases for computing the PTET include all items of income, gain, losses, or deduction to the extent they have included in the city taxable income of a partner, member, or resident shareholder. Additionally, a credit equal to the resident partner, member, or shareholders’ direct share of the NYC PTET is available to apply against their personal income tax.
The NYC PTET election is made in the same manner as the NYS PTET election.
The pre-amended version of the NYS PTET only allowed NYS-sourced (i.e., apportioned) income for S corporation shareholders. This limited the benefits for the resident shareholders (i.e., non-apportioned shares). These amendments have expanded the scope of the PTET base and, under certain circumstances, provide enhanced benefits to resident shareholders of an S corporation. The NYS legislature enacted these laws after the due date for NYS election PTET and estimated payment. Subsequently, NYS amended the law to provide a revised due date to make the election and pay any additional estimated tax to September 15, 2022. This revised deadline is only applicable for tax year 2022.
With respect to the revision of the add-back provision, some taxpayers may have overpaid their prior-year NYS taxes and should consider whether the overpaid tax rises to the level of materiality that would warrant a refund claim.
The NYC PTET election may, in some cases, provide a tax benefit; however, taxpayers must model the potential effects of the election to understand the tax implications at the federal, state, and local levels.
The speed at which these provisions have been enacted and the frequent revisions and corrections to it have created a complex state tax framework that requires careful consideration and modeling in order to understand the full impact of these provisions and elections with consideration of each taxpayer’s unique facts and circumstances. We recommend that NYS and NYC taxpayers work closely with their tax advisors to understand the most favorable position to undertake.
The SAX State & Local team is dedicated to demystifying and clarifying this area of business practice for our clients. If you find yourself ensnared in this area of tax, don’t hesitate to get in touch with the SAX State & Local Tax Practice or your SAX engagement partner.
Reach out at:
Edvin Givargis, SALT Partner at [email protected].
Jennie Khimthang, Tax Manager at [email protected].