New York State Budget Enacts an Elective NYC Pass-Through Entity Tax
On April 9, 2022, Governor Hochul signed legislation which creates an elective NYC Pass-Through Entity Tax (the “NYC PTET”) that is very similar to the New York State Pass-Through Entity Tax (the “NYS PTET”). The NYC PTET allows certain partnerships and S corporations to elect to pay an entity level tax at a rate of 3.876% and for eligible partners and shareholders of such entities to receive a credit against their personal income tax for their share of such tax.
Like the NYS PTET (and other elective pass-through entity taxes adopted by other jurisdictions), the NYC PTET is designed to allow a federal deduction for state and local taxes in excess of $10,000, and thus otherwise nondeductible, under the 2017 Tax Cuts and Jobs Act. The NYC PTET is potentially great news for certain New York City fund managers and other New York City taxpayers. The NYC PTET is effective for taxable years beginning on or after January 1, 2023.
The legislation also made certain significant changes to the NYS PTET, also discussed in this alert.
What is the NYC PTET?
The NYC PTET is a 3.876% NYC pass-through entity tax on the NYC pass-through entity taxable income of qualifying partnerships and S corporations that elect to be subject to the tax. NYC pass-through entity taxable income is “the sum of all items of income, gain, loss, or deduction to the extent they are included in the [NYC] taxable income” of a partner or shareholder that is subject to NYC tax. The NYC PTET is in addition to the NYC Unincorporated Business Tax.
Eligible Entities for the NYC PTET Election
A partnership (including a limited liability company) may generally elect to pay the tax if it: (1) is a partnership for federal income tax purposes (i.e., not a disregarded entity) that is not a publicly traded partnership and (2) has a partnership return filing requirement in New York State and at least one partner who is a NYC resident.
An S corporation may generally elect to pay the tax if it: (1) is a New York S corporation and (2) has only NYC resident individual shareholders. The shareholder limitation may prevent many S corporations from making a NYC PTET election.
Entities meeting these requirements are referred to as qualifying partnerships and S corporations.
Making the Election
An election by a qualifying partnership or S corporation must be made annually on or before March 15th of each year, in the same manner and with the same timing as the NYS PTET. The election, once made, is irrevocable for the year of the election.
Estimated Tax Payments
Estimated tax payments are required to be made in four equal installments on March 15th, June 15th, September 15th, and December 15th. The amount of the estimated tax due is the lesser of 90% of the tax due for the taxable year or 100% of the tax shown on the return of the electing partnership or S corporation for the preceding taxable year (if the NYC PTET was due for the prior year).
Filing and Paying the Tax
The NYC PTET for each year is due on or before March 15th of the following year (or an extended date therefor). When the NYC PTET return is filed, the electing partnership or S corporation must certify it is a qualifying partnership or S corporation.
Partners and shareholders will receive certain information from the electing partnership and S corporation related to the NYC PTET, including the partner’s or shareholder’s share of the NYC PTET paid by the electing partnership or S corporation.
Liability for the Tax
The electing partnership or S corporation is liable for the payment of the NYC PTET. However, NYC resident taxpayers that are eligible to claim a credit will be severally liable for their share of the NYC PTET to the extent the tax is not paid by the electing partnership or S corporation. NYC resident taxpayers that manage, control, or have a duty to act on behalf of the electing partnership or S corporation for NYC PTET purposes are jointly and severally liable for the NYC PTET if it is not paid by the electing entity.
NYC Pass-Through Tax Credit
NYC resident taxpayers that are partners or shareholders of electing partnerships and S corporations are entitled to a credit against their NYC personal income tax for their share of the NYC PTET paid by the partnership or S corporation.
Like the NYS PTET, NYC resident taxpayers who claim a credit for the NYC PTET are required to add back the amount of the credit to their gross income when determining their New York adjusted gross income.
If an NYC resident taxpayer is a partner or shareholder in more than one electing partnership or S corporation, the NYC resident is allowed to aggregate all the credits they are entitled to for the year. If the amount of the credit exceeds the NYC resident taxpayer’s New York City tax due, the excess will be treated as an overpayment that can be credited or refunded.
Changes to the NYS PTET
There were two technical changes to the NYS PTET. First, the law made clear that the NYS PTET paid by a partnership or S corporation does not have to be added back twice in determining NYS taxable income of the individual partners or shareholders. This change is effective January 1, 2021. This may also mean that a partnership is not required to addback NYS PTET that it paid for purposes of determining its own NYS PTET, which may have been technically required under the original law.
Second, it allows an electing S corporation to certify that it has only NYS resident shareholders, in which case it is subject to NYS PTET on all of its taxable income (i.e., not limited to New York source income). This could be very beneficial to shareholders of S corporations with only NYS residents, as the S corporation would generally pay greater NYS PTET and its shareholders would correspondingly receive a greater federal benefit. This change is effective for tax years beginning on or after January 1, 2022. Under special transition relief for 2022, the certification that the S corporation has only NYS resident shareholders for 2022 must be made by March 15, 2023 (instead of March 15, 2022) and there are adjustments for the estimated NYS PTET payments that are required to be made by an electing S corporation for 2022.
If you have any questions regarding the NYC PTET or the NYS PTET rules, please contact your primary Kleinberg Kaplan attorney or one of the members of our Tax Department.