On April 9, 2022, New York Gov. Kathy Hochul signed Senate Bill 8009C/Assembly Bill 9009C into law (the Budget), which includes the enactment of a New York City pass-through entity tax (NYC PTET) program and changes to the New York State pass-through entity tax (NYS PTET) program enacted last year. A highlighted description of the new and amended programs follows below.
New York City PTET
Effective for tax years beginning on or after Jan. 1, 2023, an optional NYC PTET is available to any partnership that files a New York State partnership return or for S corporations where all of the shareholders are residents of New York City. The tax is in addition to all other current taxes including the Unincorporated Business Tax and the General Corporation Tax.
For partnerships, the tax is imposed on all of the unapportioned and unallocated pro-rate share of income attributed to New York City residents, and only city residents are permitted a credit for such taxes. For S corporations, all of the income of the shareholders (who must all be New York City residents) are included in the tax base. The tax rate is 3.876%.
Like the NYS PTET program, an annual election must be made by the first estimate due date (March 15 of the tax base year), and quarterly estimated payments are required. The tax return is due March 15th of the year after the tax year ends.
New York City residents of electing entities are entitled to a credit against their city personal income tax liability. Similar to the state program, the amount of the NYC PTET credit is added back in computing the individuals’ state income.
New York State PTET amendments
As originally enacted, the NYS PTET program uses different tax bases for partnerships and S corporations. For partnerships only, the tax base includes’ the resident partner’s share of total income regardless of allocation/apportionment to New York State. Under the new provisions effective for the 2022 tax year, an S corporation that only has New York State resident shareholders will include all of the shareholder’s income in the S corporation’s tax base, similar to partnerships, assuming all proper certifications are made timely.
For the 2022 tax year, the S corporation must file a certification with its return that it meets the requirements of an electing resident S corporations. In future years, the certification must be filed with the election (the election for 2022 was due March 15, 2022). Such S corporations are now referred to as “electing resident S corporations” – all other S corporations are referred to as “electing standard S corporations.” For electing standard S corporations, only New York-sourced income subject to the personal income tax (Article 22) is included in the pass-through entity’s tax base.
Additionally, for New York personal income tax purposes, the amount of NYS PTET credit claimed by partners, members, or shareholders of electing entities on their New York income tax returns is only required to be added back once, under section 612(b)(43), using Form IT-225, New York State Modifications. The Budget amended section 612(b)(3) to include new subsection (c), which states “income taxes,” for the purposes of determining personal income tax, do not include the NYS PTET to the extent it is added back under section 612(b)(43). The amendment also provides that “income taxes” do not include other state pass-through entity taxes that are substantially similar to the NYS PTET, and are added back under section 612(b)(43), using Form IT-225. The changes are retroactive for tax years beginning on or after Jan. 1, 2021.
State and city modifications
The Budget also clarified that the NYS PTET, and newly enacted NYC PTET, are required to be added back on the General Corporation Tax and Banking Corporation Tax returns in computing New York City income. The changes are retroactive for tax years beginning on or after Jan. 1, 2021.
Takeaways and considerations
New York State and New York City are examples of jurisdictions with pass-through entity tax programs that continue to evolve and expand to maximize the federal benefit. It is anticipated that further guidance will be issued by the state and city to further define the scope of the respective programs.
Understanding whether a pass-through entity election results in a benefit requires modeling and detailed analysis of all the risks and opportunities involved. Especially in large, multi-state pass-through entities, a pass-through entity tax election may provide tax savings for select members, while increasing tax on other members, thus producing an unintended result. A pass-through entity must conduct thorough due diligence to understand how and whether the election is ultimately beneficial.
Taxpayers should carefully plan and consider all aspects of a pass-through entity election before choosing to elect. In 2022 and through the date of this article, both New Mexico and Utah have adopted a pass-through entity tax effective for 2022 and Virginia for 2021. Taxpayers with questions about electing into a pass-through entity tax should consult a state and local tax adviser.
