In April 2021, New York State passed legislation whereby eligible pass-through entities (“PTEs”) can elect on an annual basis to compute and pay New York tax on its New York sourced business income at the entity level. The significance of this election is that the business taxes paid by an eligible entity can be deducted in determining federal income that passes-through to the owners, resulting in less federal tax paid by the owners on their share of the PTE income. Furthermore, owners of PTEs electing to pay the entity level tax will receive a credit against their personal New York tax liability which eliminates the double taxation of the PTE income.
The New York State Tax Department has finally issued formal guidance on the PTE tax in the form of TSB-M-21(1)C, (1)
- Who can Apply: Only an authorized person may make the PTE tax election on behalf of an eligible PTE. According to the Tax Department, tax professionals may not make this election on behalf of their clients.
- How to Apply: The only way to apply is online, through the NYS Tax Department’s Online Business Account Service. If you do not have an online business account, it is vital to get one. Click here to get access to the application. For tax year 2021, the election deadline is October 15, 2021. For tax years 2022 and later, the annual election may be made online on or after January 1 but no later than March 15.
- When to Pay the PTE Tax: The NYS Tax Department has committed to make forms available (online only) to pay by December 2021. This is necessary in order for taxpayers to get the federal tax benefit in 2021. The current law called for payment of the 2021 tax in March 2022, which would have been a problem for cash-basis taxpayers looking to get a 2021 deduction.
- Estimated Tax Payments: Under the current law, partners or shareholders in PTEs who expected their firms to elect into the program in 2021 and pay the tax are still required to pay-in their estimated income taxes as if their firms were not going to make the election. This ends up giving NYS extra taxes for several months, since partners are supposed to pay-in all of their estimated taxes as normal and their firms will be paying the full entity taxes by the end of 2021. Taxpayers will have to wait until they file their 2021 taxes, to get refunds of their estimated taxes. This is only a 2021 issue, though; in 2022, only the entity will have to pay the tax. For PTE tax years beginning on or after January 1, 2022, an electing entity is required to pay estimated tax on the amount of PTE tax calculated for the current taxable year using the online application. Estimated payments 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 PTE tax return falls.
- Claiming the PTE Credit: Eligible taxpayers that receive a PTE tax credit from an electing entity may claim the credit on Form IT-653, Pass-Through Entity Tax Credit, and attach it to their New York State personal income tax return.