How the Pass-Through Entity Tax Could Save You Federal Income Tax
New York, NY — April 26, 2021
IRS approved and New York enacted Pass-through Entity Tax to save New Yorkers up to 4% of your federal income taxes which is equal to about 7% of your pre-tax income
For tax years beginning in 2018, an individual is limited to an annual aggregate $10,000 of itemized State and Local tax deductions ("SALT") for federal income tax purposes. This limitation has resulted in a significant increase in federal income tax liability for individual taxpayers in high-tax states, such as New York.
On April 19, 2021, New York Pass-Through Entity ("PTE") tax was signed into law effective for tax years beginning on or after January 1, 2021.
How will the PTE tax save you federal income tax?
The PTE tax is an optional elective tax imposed on "pass-through entity taxable income" and is fully deductible by the electing partnership and S corporation. The deduction reduces your share of pass-through income and hence your federal taxable income. It is a "workaround" to the SALT deduction limitation. For the PTE tax paid, a direct partner, member or shareholder is entitled to a tax credit against the individual owner's NY State personal income tax liability for their share of the PTE tax. Any excess may be taken as a credit or refund.
Who is eligible to deduct this PTE tax as a "workaround" to the SALT deduction limitation?
Partnerships (or LLCs taxable as partnerships) with New York source income or with one or more NY resident partner (even with no New York source income) and NY S Corporations are eligible to make the election to pay and deduct the PTE tax.
The election is made annually and is irrevocable for the year. It is due on March 15 of the electing year and for 2021 only, it is due by October 15, 2021.
How much federal deduction could you take under this PTE tax?
For NY resident partners or members, the tax is imposed on their share of the electing partnership's income, gain, loss or deduction. For NY nonresident partners or members, the tax is imposed on their share of the electing partnership's income, gain, loss or deduction from New York Sources ("New York source income").
For NY S corporation shareholders, the tax is imposed on their share of the electing S Corporation's income, gain, loss or deduction from New York Sources.
With eligible partnerships include those conducting business outside New York but having New York resident partners, the application is unlimited to partnerships carrying out a trade or business.
On the other hand, it is important to model the tax impact and in particular, to nonresident owner whether they will be given tax credits by their own residency state for their share of the PTE tax that was paid by the entity to NYS.
There are similar provisions, but not exactly the same, have been or being enacted by other states.
Please feel encouraged to contact your Perelson Weiner partners with any questions. We're here to help you.
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