New York Pass-Through Entity Tax (PTET) (2024)

Quick Reference

Election

Optional election for partnerships and S corporations to pay entity-level tax.

Rate: Same as top individual rate (10.90% for 2024)

Purpose: Bypass $10,000 federal SALT deduction cap

Benefit: Entity-level tax is deductible for federal purposes (not subject to SALT cap)

Key Dates (2024 Tax Year)

Annual election deadline: March 15, 2024

Estimated payment due dates: - March 15, 2024 - June 17, 2024 - September 16, 2024 - December 16, 2024

Final return deadline: March 15, 2025 (or extended due date)

Who Can Elect

Eligible entities: - Partnerships (general, limited, LLP) - S corporations - LLCs taxed as partnership or S corporation

Not eligible: - C corporations (pay corporate tax instead) - Sole proprietorships - Single-member LLCs (disregarded entities) - Publicly traded partnerships

Details

How PTET Works

Mechanics:

Without PTET: 1. Partnership/S corp income passes through to owners 2. Owners pay individual tax on their share 3. Owners deduct SALT on Schedule A (limited to $10,000) 4. Excess SALT not deductible

With PTET: 1. Entity elects to pay PTET 2. Entity pays tax at entity level (10.90%) 3. Entity deducts tax as business expense for federal purposes (not subject to SALT cap) 4. Owners receive credit against their NY individual tax 5. Owners get full federal deduction (no SALT cap)

Federal benefit: - PTET is deductible business expense - Not subject to $10,000 SALT cap - Saves federal tax at owner's marginal rate (up to 37%)

NY neutral: - Credit equals tax paid at entity level - No NY tax increase or decrease

Overall result: - Federal tax savings with no NY tax cost

Making the Election

Annual election required: - Must elect each year - Election deadline: March 15 of tax year

Late election: - No relief for missed deadline (strict rule) - Cannot elect after March 15 (even if extend return)

Who makes election: - Partnership: all partners must consent - S corporation: majority shareholder consent required

Form: - File Form IT-2658-E (Annual Election) by March 15 - Binding for all owners

Revocation: - Election is irrevocable once made - Cannot change mind during year

Calculating PTET

Tax base: - Sum of all owners' NY-source income from entity - Calculated at entity level

Tax rate: - 10.90% (same as top individual rate)

Modifications: - Start with federal taxable income from entity - Add NY additions - Subtract NY subtractions - Result = NY-source income subject to PTET

Nonresident owners: - Only their NY-source income included in PTET base - Non-NY income excluded

Example:

Partnership with 3 partners: - Total NY income: $1,000,000 - Partner A (resident): $400,000 - Partner B (resident): $400,000 - Partner C (nonresident, NY-source): $200,000

PTET calculation: - Total subject to PTET: $1,000,000 - PTET: $1,000,000 x 10.90% = $109,000

Federal deduction: - Partnership deducts $109,000 on federal return - Reduces each partner's federal taxable income

Estimated Payments

Quarterly payments required:

Due dates (2024): - 1st quarter: March 15, 2024 (with election) - 2nd quarter: June 17, 2024 - 3rd quarter: September 16, 2024 - 4th quarter: December 16, 2024

Amount: - Based on estimate of current year PTET liability - Safe harbor: 90% of current year or 100% of prior year

Form: - Form IT-2658 (PTET estimated payment voucher)

Underpayment penalty: - Applies if estimated payments insufficient - Annualized income method available

Overpayments: - Can be refunded to entity - Can be credited to next year

Owner Credits

Owners receive credit for PTET paid on their behalf:

Credit amount: - Proportionate share of PTET paid by entity - Claimed on individual return

Residents: - Claim credit on Form IT-201 (resident return) - Form CT-34-SH shows credit amount - Credit against NY resident tax

Nonresidents: - Claim credit on Form IT-203 (nonresident return) - Form CT-34-SH shows credit amount - Credit against NY tax on NY-source income

Refundable: - Credit is refundable (if exceeds tax liability) - Overpayment refunded to owner

Does not affect SALT cap: - Credit is not a deduction - Not subject to $10,000 federal SALT cap - Owners may still deduct up to $10,000 SALT on federal return

Multi-Tier Entities

If partnership owns interest in another partnership:

Upper-tier partnership: - Can elect PTET on its own income - Receives credit for PTET paid by lower-tier partnership - Can pass credit through to its partners

Lower-tier partnership: - Can elect PTET separately - PTET paid flows up to upper-tier as credit

Planning: - Each tier makes independent election - Coordinate elections across tiers - May be beneficial to elect at both levels

Federal Tax Benefit Calculation

Example calculation:

Facts: - NY partnership income: $1,000,000 - Single owner in 37% federal bracket - NY resident, 10.90% state rate

Without PTET: - Federal taxable income: $1,000,000 - Federal tax: $370,000 (37%) - NY state tax: $109,000 (10.90%) - SALT deduction: $10,000 - SALT deduction benefit: $3,700 (37% x $10,000) - Net federal tax: $366,300

With PTET: - PTET paid by entity: $109,000 - Federal taxable income: $891,000 ($1,000,000 - $109,000) - Federal tax: $329,670 (37% x $891,000) - NY state tax: $0 (credit for PTET) - SALT deduction: $10,000 (available for other state/local taxes) - SALT deduction benefit: $3,700 - Net federal tax: $325,970

Savings: - Federal tax reduction: $40,330 ($366,300 - $325,970) - Effective savings: 37% x $109,000 = $40,330

Result: PTET saves federal tax equal to owner's marginal rate times PTET paid.

Composite Returns

NY also has nonresident composite return option:

Composite return (Form IT-203-GR): - Partnership files single return for nonresident partners - Partners do not file individual NY returns - No credit carryforward for partners

PTET vs. Composite: - PTET provides federal benefit (composite does not) - PTET refundable credit to owners (composite is final) - PTET generally preferred for federal savings

Can use both: - Elect PTET for federal savings - File composite for convenience - Not mutually exclusive

Special Situations

Part-year residents: - Allocate income between resident and nonresident periods - PTET credit allocated accordingly

Multiple entities: - Each entity makes separate election - Owner may receive credits from multiple entities - Aggregate all credits on individual return

Trusts and estates: - Can be partners/shareholders - Receive credit for their share of PTET - Report on fiduciary return

Guaranteed payments: - Included in PTET base - Treated as distributive share for PTET purposes

Common Mistakes

Missing election deadline: - Must file by March 15 (no extensions) - No relief available if missed - Lose entire year's benefit

Insufficient estimated payments: - Causes underpayment penalty - Ensure quarterly payments sufficient

Not claiming credit: - Owners forget to claim credit on individual returns - Must attach Form CT-34-SH to individual return

Electing when not beneficial: - Low-income owners may not benefit - If owners not subject to SALT cap, no federal benefit

Not coordinating with other states: - Some states do not allow credit for PTET paid to other states - Multistate owners may face double taxation

Planning Considerations

Who benefits most: - High-income owners (37% bracket) - Owners maxing out $10,000 SALT cap - NY residents with high property taxes - Owners with multiple state tax liabilities

Who may not benefit: - Low-income owners (not subject to SALT cap) - Owners with losses (no tax to reduce) - Entities with nonresident owners in non-credit states

Timing: - Make election by March 15 - Ensure entity has funds for payments - Coordinate with owners before electing

Cash flow: - Entity must pay quarterly - Owners get credit when filing individual returns - May create cash flow mismatch

Recordkeeping: - Maintain documentation of election - Track payments and credits - Provide Form CT-34-SH to all owners

Citations

New York Tax Law: - NY Tax Law Article 24-A - Pass-Through Entity Tax - NY Tax Law § 860 - Definitions - NY Tax Law § 862 - Imposition of tax - NY Tax Law § 863 - Credit for tax paid

Regulations: - 20 NYCRR Part 126 - Pass-Through Entity Tax

NYS Department of Taxation and Finance: - TSB-M-21(1)I - Pass-Through Entity Tax - TSB-M-21(1)C - Pass-Through Entity Tax (Corporate) - TSB-M-22(1)I - PTET Updates - https://www.tax.ny.gov/pit/ptet/

Forms: - Form IT-2658-E - Annual Election for PTET - Form IT-2658 - PTET Estimated Tax Payment Voucher - Form IT-653 - Pass-Through Entity Tax Return - Form CT-34-SH - New York Pass-Through Entity Tax Credit - Form IT-112.1 - New York State Resident Credit (includes PTET credit)

IRS Guidance: - Rev. Proc. 2021-45 - IRS allows deduction for state PTET - Notice 2020-75 - SALT cap workaround guidance

Other: - NY Department of Taxation PTET FAQs - https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/pit/