New York State has enacted a new passthrough entity (PTE) tax as part of the most recently approved budget that was passed on April 6, 2021. This provides a long-awaited workaround to the $10,000 Federal State and Local Tax (SALT) Cap that was passed under the Tax Cuts and Jobs Act in December 2017.
Partnerships and S Corporations can make an annual election to pay the New York State tax at the entity level, allowing the partners and shareholders of these entities to take a credit for the taxes paid on their personal tax return. The allowable credit will be equal to the amount of the partners’ and shareholders’ direct share of the PTE tax. Businesses are expected to deduct the state income tax as a business tax expense at the entity level on the pass-through entities’ federal tax returns, and not at the business owners’ level, i.e., the state tax will not be required to be deducted as an itemized deduction for individual business owners; as such state tax expense deductions will not be limited to $10,000.
Eligible Partnerships and S Corporations must make the election by the due date of the first estimated tax payment, and once they have done so, it is irrevocable for the year in which it is made. However, there is an exception for tax year 2021 that allows for the election to be made until October 15, 2021. For 2021 only, the electing Partnerships and S Corporations are not required to make estimated tax payments. Partners and shareholders that are electing to take advantage of the PTE tax should continue to make personal estimated tax payments for tax year 2021.
An effective election will need to be made by an officer, manager, or shareholder of an S Corporation. The election for a partnership can be made by any member, partner, owner, or other individual that has authority to make binding decisions or sign tax returns.
New York has been seeking an alternative to the Federal SALT cap for some time now. Multiple other states have enacted similar PTE tax, including Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin.
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The materials contained herein are intended for educational and informational purposes only and do not constitute tax or legal advice. Readers are responsible for obtaining such advice from their tax and legal counsel.