New York’s Pass-Through Entity Tax (PTET) is now in its third year. Since its passage as part of the 2021/22 budget legislation in April 2021, New York has made some significant changes and released interpretive guidance responding to some of the most common questions about the elective tax. It has become clear that the PTET offers significant benefits to many taxpayers by shifting the incidence of the tax from individuals, who are limited to a $10,000 federal deduction for state and local taxes, to entities that may deduct the entirety of the tax federally. The legislation has overall been a success with the state collecting $16.4 billion from businesses in PTET payments during its first year, according to New York’s budget report. But it has also become clear that New York’s PTET regime can present some logistical headaches, and confusion over the election process, addbacks and other key aspects of the tax has frustrated some taxpayers and their advisors. This article is intended to provide answers (to the extent they are available) to some of the most common PTET questions and concerns. But first, let’s briefly review the New York State and City PTET and some of its unique features.
Like all of the PTETs that were passed as a response to the limitation on the federal individual SALT deduction as part of the Tax Cuts and Jobs Act, the New York PTET is fully elective (Connecticut’s mandatory PTET was eliminated as of the 2024 tax year). But unlike many other PTETs that allow the election on a timely filed return, New York requires that the election be made by March 15 of the taxable year. In other words, for the 2023 tax year, the election would have had to be made by March 15, 2023—long before many taxpayers know whether making the PTET election will have any benefit for them. This deadline was extended in 2021 and 2022, due to the passage of legislation making significant changes to the PTET, but New York was firm in denying any further extensions in 2023. Any pass-through entity (other than a disregarded entity) is eligible to make the election.
Partnerships and S corporations calculate their PTET taxable base somewhat differently. Partnerships include the entire distributive share of income received directly by resident individuals or trusts, and income sourced to New York received by nonresident individuals or trusts. Note that a partnership that has regarded entities as partners can still make the election, but they would not include in the PTET taxable base the distributive share received by those entities. In addition, no combined PTET returns are permitted; the PTET election and tax calculation is entity by entity. S corporations can also include the entire distributive share received by resident individual or trusts as of 2022, but only if all of the shareholders are residents. It must affirmatively certify at the time of the election that all of its shareholders are New York residents to be treated as a resident S corporation; otherwise, only sourced income will be included in the base. Beginning with the 2022 tax year, New York enacted a New York City PTET, which operates similarly to the New York State PTET. For an S corporation to make the New York City PTET election, it must certify at the time of election that all of its shareholders are NYC residents. Partnerships can elect into the NYC PTET so long as any of its individual partners are NYC residents.
Partners and shareholders get a dollar-for-dollar credit on their personal income tax returns for the PTET paid on their distributive share. They must also add back the credit amount into their taxable income. In September 2022, New York–issued guidance, discussed in more detail below, clarifying that the PTE must add back any estimated payments that exceed the amount of PTET due, as well as PTETs paid to other jurisdictions.
One of the more unique features of the New York PTET—and one that can cause the most headaches and frustration—is the election and filing process. Taxpayers must have an online account with the New York State Department of Taxation and Finance (the “Department”) in order to make the election, file the returns, and make any payments. There is no alternative—if taxpayers have not made sure that their online account is correctly set up prior to the election due date, they are likely out of luck for that year. In addition, only a responsible person of the taxpayer—not a tax preparer or other advisor—can make the election under the law.
NEW YORK PTET FREQUENTLY ASKED QUESTIONS
1. Election Questions
Q. I made the PTET election for 2023 but we realized afterwards that the S corporation is unlikely to benefit from making the election. What should I do?
A. If you change your mind prior to March 15—i.e., you made the election in January 2023 for the 2023 tax year and you realize on March 14, 2023 that you don’t want to elect into the PTET—you can revoke the election. Otherwise, after March 15 of the taxable year, the election cannot be revoked. Even if there is no PTET taxable income, you must file a PTET return. Fortunately, the election only applies to that tax year.
Q. My partnership’s fiscal year ends January 31. When do I make the election?
A. For the partnership’s taxable year ending January 31, 2023, the partnership will still make the PTET election prior to March 15, 2023. Similarly, the deadline to file or request an extension to file PTET will be based on the calendar year—i.e., by March 15, 2024. But the partnership’s PTET taxable income reported on its 2023 PTET return will be based on the partnership’s fiscal year ending January 31, 2023.
Q. Can I still file a PTET return if my S corporation underwent a reorganization after it had already made the PTET election?
A. If the corporation underwent an F reorganization, the PTET election will remain effective for the successor entity and the PTET return should be filed using the employer identification number (EIN) for the entity that made the election. But for any other type of reorganization or merger, the PTET election will not be valid for the surviving entity if it has a different EIN than the electing entity.
Q. On March 1, my single-member LLC added a new member so that the LLC is now taxed as a partnership and can elect into PTET. Am I good to go?
A. Probably, but make sure to set up the online account for the LLC ASAP. Since assumedly the LLC has never filed a return in New York (because it was previously a disregarded entity), you will likely need to go through several verification steps to set up the online account. It could be very difficult to set up the online account on March 15 to ensure a timely election, and the Department has made clear that there are no exceptions. If the system crashes and you cannot get the online account set up so as to make the election by March 15, you will be out of luck.
Q. I want to make the PTET election, but it’s March 15 and I just faxed in my New York State S election form (CT-6). What do I do?
A. Pray? Although a timely filed S election is retroactive until January 1, New York would need to make adjustments to the taxpayer’s online account to permit the PTET election; that may not happen in time to make the election. To date, New York State has been unwilling to provide any other mechanism to elect into the PTET.
Keep in mind that the federal S election does not apply in New York; corporations must separately make a New York S election. Even if the corporation is deemed to have made a New York S election under Tax Law § 660(i) because more than half of its federal taxable income for the taxable year consists of investment income, if the corporation has not taken the affirmative steps for New York to treat it as an S corporation prior to March 15 so that the corporation’s online account offers the option of making the PTET election, the corporation will have no way to make a timely election.
Q. My S corporation made a timely PTET election as a standard S corporation. But by the end of the year, all of the owners were New York residents. Can I file as a resident S corporation?
A. It does not appear so. You are stuck with the original election, because what matters is the residency of the owners at the time of the election.
2. Calculating Estimated Payments
Q. My partnership made the New York PTET election for the first time in 2023. We are expecting a significant income event at the end of the year or in early 2024. How do we calculate estimated payments?
A. Estimated payments must be 90% of PTET shown due for that year or 100% of PTET for the prior year. For the 2022 tax year only, when the election deadline was extended until September 2022, the Tax Department required that 75% of the PTET shown due on the return be paid by September 15, 2022 for an election made after March 15 to be valid.
For a first-time PTET filer, calculating estimated payments can be complicated if the tax likely to be due for the year is unknown, particularly if there are questions about a possible income event that may or may not happen by year-end. This is particularly true because changes in the guidance regarding addbacks, discussed in more detail below, would require the taxpayer to add back any overpayments of estimated taxes that are deducted federally. Generally, estimated payments must be made in four equal installments and there is no guidance suggesting other methods of calculating estimates. But practitioners have reported feedback from the PTET support center indicating that the annualized income installment provisions under Tax Law § 685(c)(4) would apply to PTET as well. It is recommended that taxpayers seek confirmation from the Department if they intend to use the annualized method.
3. All About The Addback
Q. Does the partnership or S corporation add back the PTET payments as a New York additional modification?
A. Under Tax Law § 612(b)(3), the individual adds back their share of the PTET, reported to them on Form IT-653. But if the entity overpays its estimated taxes, it must add back the amount overpaid on its PTET return for the year it was paid (not in the year that the refund was received) based on guidance issued by the Department in September 2022.
Q. But what about when the entity receives a PTET refund in 2023 and has to include that in federal taxable income? Do I get to reduce PTET taxable income by that amount for 2023?
A. New York has not yet issued guidance on that question or provided for any New York modification that would remove the refund amount from being taxed again in 2023.
Q. Do I have to add back PTET paid to other jurisdictions?
A. Yes. On the individual’s IT-225, any PTET paid to another jurisdiction must be added back.
Q. What about the entity?
A. The partnership or S corporation must add back all pass-through entity taxes paid and deducted for federal purposes in that year’s computation of PTET taxable income.
4. Other PTET Credit Issues
Q. On my IT-201, I claimed a resident credit for taxes paid to New Jersey on my wages earned there as well as a PTET credit. How are the credits applied?
A. New York State applies payments first (i.e., estimated payments and withholding), then nonrefundable credits and then finally refundable credits, including the PTET. Note that New York does not pay interest on refundable credits.
Q. Can a grantor trust that is a partner and files a trust return claim a PTET credit?
A. No, only the individual grantor can claim the credit.
Q. I am a New York resident. Will I be able to claim a resident credit for PTET paid to other jurisdictions?
A. Yes, but be aware that whether you are claiming a credit for PTET paid or personal income taxes paid to another jurisdiction, the credit is limited by several factors: Was the PTET paid in the same year? Does the PTET paid exceed the New York taxes due on the same income? Is the income derived from sources in the other state using New York’s sourcing rules? This last limitation can surprise resident taxpayers, who don’t realize that resident credits are always limited by New York’s sourcing rules. So, if PTET is paid to Connecticut by the partnership using Connecticut’s market-based single factor sourcing rules, a New York resident might not be able to take a credit for the full amount of PTET paid, if, under New York’s three-factor formula for partnerships, less income would have been sourced to Connecticut.
5. Amending Your PTET Return
Q. Can I amend a PTET return?
A. The Department is strongly discouraging taxpayers from amending a PTET return. To amend a PTET return, a taxpayer must first request and receive permission from the Commissioner. Recent guidance lays out more specific requirements and limitations and amending a PTET return. First, a taxpayer seeking to amend must request permission by letter in advance of amending. Second, that request must be received by the Department within two years of the election date for the year the entity wants to amend! In other words, the three-year statute of limitations does not apply to requests to amend.
It’s notable that every PTET action—the election; payments; and filing a return—must all be made through the taxpayer’s online account with the exception of a request to amend.
Should a request to amend be denied or be untimely, assumedly the taxpayer would make any changes by amending its New York partnership or S corporation return, rather than its PTET return.
6. Investment Partnership and Holding Companies
Q. We are still wondering: will the IRS permit a deduction for PTET paid by an investment partnership?
A. So are we! As of the date of this article, we have not heard of any IRS adjustments for a PTET deduction claimed by an investment partnership or of any further guidance being issued by the IRS related to this issue.
Q. I have an S corporation holding company owned by New York residents that doesn’t do business in New York and hasn’t previously filed in New York. Can it make the New York State election and make the PTET election?
A. To qualify for NY S corporation treatment, it must be a general business corporation taxable under Article 9-A. If the holding company has no nexus (physical or economic) with New York but for its owners, it might not qualify to make a New York State election and therefore make the PTET election.
Many of the issues raised in the Q&A above can cause headaches and confusion at the time of election and filing. But it’s important to understand the nuances and logistics of the New York PTET, as well as other states’ PTETs, before the election is made. Of course, the election is limited to a single year, so perhaps some will conclude that there’s “no harm, no foul” if an election is made and it turns out there is limited to no benefit from the election. But the election does not come without costs—from return preparation costs to audit risk, as well as complications that might arise in a partnership, for example, with uneven benefits of the PTET for residents and nonresidents. All of these factors should be considered—and considered early, given the due date of the election—before the PTET election is made.
Elizabeth Pascal, Esq., JD, is a partner in the state and local tax group of Hodgson Russ LLP, with a focus on New York State, New York City, Connecticut and multistate tax issues. She assists individual and business clients with New York State and New York City audits, including residency, withholding tax, unincorporated business tax, commercial rent tax, and corporate tax audits. She can be reached at epascal@hodgsonruss.com or (716) 848-1622.