18 May New York Pass-Through Entity Tax
New York State Pass-Through Entity Tax
Under the Tax Cuts and Job Act that was passed in 2017, each individual taxpayer was limited to $10,000 of State and Local Taxes (“SALT”) to be allowed as an itemized deduction on their personal Federal tax return. Since then, multiple states have created a Pass-Through Entity (PTE) Tax as a workaround to this limitation. The PTE Tax is paid by the S-Corporation or Limited Liability Companies that are taxed as Partnerships, and each partner/member is then allowed to take a pro-rata share of that deduction on their individual tax return (not subject to the $10,000 limit).
Governor Cuomo recently passed a law that will add New York to the list of states that have a Pass-Through Entity Tax. In order to qualify for this tax, you must make an annual election by March 15th regardless of whether you have a calendar or fiscal year-end. Once the election is made, it is irrevocable for that given tax year. Each entity will be required to pay estimates on the Pass-Through Tax which will be the lessor of 90% of the current year New York State tax or 100% of the prior year New York State tax. The quarterly estimates will then be due on the 15th day of March, June, September, and December regardless of calendar or fiscal year-end. Because of the timing of this bill, there will be no quarterly estimates required for tax year 2021. The deadline to file the election has also been extended to October 15, 2021. By making this timely election, the entity will pay the Pass-Through Entity Tax with its New York State entity tax return by March 15th, 2022 and have each partner take a pro-rata share of that tax on their individual tax return. If you do not make this election, you will not be eligible for the PTE Tax for 2021 and will have to file the election prior to the March 15, 2022 deadline to be eligible for the following year.
We will continue to monitor any further updates because there is currently no specific guidance as to how to make the election by October 15, 2021. There is also no guidance on how the estimates will be paid from the pass-through entity but the first estimate is not due until March 15, 2022.
Please be on the lookout for future newsletters as we will keep you up-to-date with everything regarding the Pass-Through Entity Tax once such data is released by New York State.