New York State has enacted a new pass-through entity tax (PTET) for tax years beginning on or after January 1, 2021. The PTET is an optional tax that partnerships or NYS S corporations may elect annually. For PTET taxable years 2022 and later, the eligible entity may opt-in on or after January 1 but no later than March 15. The election to opt in to the PTET must be made online through the entity’s Business Online Services account on an annual basis and is irrevocable. An authorized person may make this election on behalf of an eligible partnership or eligible S corporation. Tax professionals may not make this election on behalf of their clients. Electing entities are required to make four equal estimated payments for a total of the lesser of 90% of the current-year tax or 100% of the prior year tax.
A tax credit is available for a direct partner or shareholder and the credit is equal to the partners’ share of the PTE tax paid. Individuals claiming a tax credit for the PTE tax paid must add back the amount of the PTET deduction for NYS. Eligible partners or shareholders must file an individual personal income tax return and attach Form IT-653, Pass-Through Entity Tax Credit, to claim the PTET credit. The PTET credit may not be claimed on Form IT-203-GR, Group Return for Nonresident Partners, or Form IT-203-S, Group Return for Nonresident Shareholders of New York S Corporations. A partner that is a partnership is not eligible for the PTET credit.
Each eligible partner’s or shareholder’s PTET credit is equal to its direct share of PTET that was reported by the electing entity on the entity’s PTET annual return. If the partner or shareholder receives more than one PTET credit, the credits are aggregated. If the amount of the PTET credit allowable for any taxable year exceeds the tax due for the year, the excess is treated as an overpayment, can be credited or refunded without interest.
Beginning in 2021, New York residents can also claim credit for entity-level taxes paid to other states that are ‘substantially similar’ to the New York PTET on account of income derived from such other states and subject to tax under Article 22. The pass-through entity tax must be paid by a partnership or New York S corporation to another jurisdiction on income derived from that jurisdiction and subject to tax under Article 22. While New York has enacted a credit for New York residents for tax paid to other states, other states may not provide such a credit. Consideration for residency of owners is a necessity.
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By Svetlana Svetlichnaya, CPA