TAX INFO

New York State (NYS) released guidance recently regarding the NYS Pass-Through Entity tax election. The NYS Pass-Through entity (PTE) election was created to allow direct owners of pass-through entities that are individuals or trusts to obtain a federal income tax deduction for the amount of NYS income taxes paid by the pass-through entity.

The NYS PTE tax applies to tax years beginning on or after January 1, 2021, and is optional.

 

Eligible entities include:

• Partnerships (other than publicly traded partnerships)

• Limited Liability Companies (but not single-member LLCs)

• Subchapter “S” Corporations with a valid New York State “S” election in effect

 

The amount of NYS income tax paid by the pass-through entity, and ultimately allocated to the direct owners, would not be subject to the $10,000 state and local income tax federal limitation that was passed under the Tax Cuts and Jobs Act. Instead, the PTE tax paid would be fully deductible on the PTE federal income tax return, reducing the amount of federal taxable income being allocated to the direct owners who are individuals or trusts. This could not only help decrease direct owners' federal income tax rates, but also potentially self-employment tax.

For NYS purposes, taxable income would presumably remain the same, not allowing a NYS tax deduction for the NYS income tax paid by the pass-through entity. Instead, any NYS tax paid by the electing PTE would be allocated to the pass-through entities' direct owners who are individuals or trusts as a deemed credit (or NYS tax payment) for NYS income tax purposes.

Key Advantages of the PTE Tax

1. Tax Savings - The new PTE tax will provide federal income tax savings. The tax paid will reduce the ordinary income allocated to each owner of the entity, making the PTE election beneficial for both income and self-employment taxes.

2. AMT - PTE tax is not subject to the Alternative Minimum Tax (“AMT”). In the past, state and local tax treated as itemized deductions often subjected taxpayers to the AMT.

3. A PTE Tax Credit – The owner is allowed a refundable dollar-for-dollar personal income tax credit on his/her NYS income tax return.  Such a person must be the electing partnership’s direct partner or member or the S corporation’s direct shareholder.

The NYS guidance was very clear that even if an entity makes a NYS PTE election, individuals are still required to make their New York State estimated income tax payments.