A Guide to Pass-Through Entity Tax in NY

If you are a partnership or an S-corporation in New York state, there is a new potential tax savings that you should be aware of called the NYS Pass-Through Entity Tax, or PTET for short. At a high level, this is an optional tax that a pass-through entity can pay to New York State on behalf of partners and shareholders to cover New York State personal income taxes. This is going to benefit a lot of pass-through business owners, as they will save money because of the lower taxable income. First, a little background history is needed to understand why New York State enacted this tax law change.

Before President Trump signed the Tax Cuts and Jobs Act of 2017, most taxpayers itemized their deductions on Schedule A. Some of the largest deductions were state and local taxes, including income taxes and property taxes that you pay to New York State. The new tax law put a cap on those state and local taxes that limited the total deduction to $10,000. This impacts high-income earners greatly, and as a result, most people now do not receive a benefit for state taxes paid and instead take the standard deduction over itemized deductions.

In response to this limitation, New York state changed their tax law and created the PTET. As long as you are showing a profit in the business, you can prepay the NYS income taxes by the end of the year. If your PTE taxable income is $2 million or less, the PTET due would be 6.85% of the PTE taxable income. On the federal side, you are going to pay less income tax because the tax deduction reduces taxable income. On the state side, you get a dollar-for-dollar credit against your personal income tax for the tax paid through the business.

For New Yorkers, you will need to make this election by March 15 each year. A roadblock is that generally CPAs cannot make this on behalf of their clients. The annual election has to be made by an “authorized person” on behalf of an eligible S Corporation or Partnership. This election is irrevocable and must be made each year. Remember, C Corporations and disregarded entities are ineligible for the PTET. Also, if you anticipate your pass-through business is going to have a loss, it doesn’t make much sense to elect into this tax. Estimated payments of PTET for 2022, and the years following, will be required quarterly, so make sure you have the cash available to make them. The four equal estimated payments will be a total of the lesser of 90% of the current-year tax or 100% of last year’s tax.

This blog was written by Bryce Kahler, Tax and Accounting Associate