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As part of its 2022-2023 budget, New York has established an elective pass-through entity (PTE) tax for New York City (City) income tax purposes.1 By making an election to pay City individual income taxes at the entity level, City residents may receive federal tax benefits in the form of deductions for the City taxes paid on this flow-through income. Although the City’s PTE tax regime mirrors New York State’s existing regime in many ways, some preliminary mechanics are outlined below. Also, the budget legislation amends the existing New York State elective PTE tax by creating a new S corporation category for entities with all resident shareholders. Finally, in separate follow-up legislation, the state has extended the deadline to make a PTE tax election for the 2022 tax year from March 15, 2022 to Sep. 15, 2022.2
New York City PTE Tax enacted
The City PTE tax election is applicable to tax years beginning on or after Jan. 1, 2023, for eligible City partnerships and resident S corporations (including limited liability companies (LLCs)).3 An eligible City partnership is any partnership as provided for in Internal Revenue Code (IRC) Sec. 7701(a)(2) that has a New York State partnership return filing obligation under N.Y. Tax Law Sec. 658(c)(1), with at least one partner or member who is a City resident individual.4 An eligible resident S corporation is any New York S corporation subject to tax under N.Y. Tax Law Sec. 209 that only has individual shareholders that are City residents.5
Elections must be made annually by the due date of the first estimated payment (generally by March 15 of the tax year) and are irrevocable.6 The City PTE tax rate is 3.876%, and it is imposed in addition to any other taxes applicable to the electing partnership (the unincorporated business income tax) or S corporation (the general corporation tax).7 Quarterly estimated payments also are required.8
For City partnerships, the PTE tax base is the sum of all items of income, gain, loss or deduction attributable to a partner or member.9 For resident S corporations, the PTE tax base is the sum of all items of income, gain, loss or deduction attributable to the City resident shareholders.10 Resident owners of eligible entities that make the election are entitled to a refundable credit equal to their direct share of City PTE tax to offset their City individual income tax.11 Similar to the state regime, the amount of the City PTE tax credit is added back in computing the individual’s state income.12
Under the budget legislation, for tax years beginning on or after Jan. 1, 2021, for purposes of the City general corporation tax and banking corporation tax, taxpayers are required to add back New York State PTE tax deducted from federal taxable income.13 However, the New York City Department of Finance has announced that it will not apply interest or impose penalties for purposes of the general corporation tax or banking corporation tax for additional tax due resulting from this addback requirement for the 2021 tax year if the tax is paid by June 15, 2022.14
New York State PTE Tax amended
Electing resident S corporations
For tax years beginning on or after Jan. 1, 2022, the budget legislation amended the state PTE tax by adding a new classification of resident S corporations that may make the election.15 Under existing law, the state PTE tax election was available to a single category of S corporations. As amended, either an electing resident S corporation or an electing standard S corporation may be eligible to make the PTE tax election. To be eligible, an electing resident S corporation must certify at the time of its election that all of its shareholders are New York residents.16 For electing resident S corporations, taxable income includes the sum of all items of income, gain, loss, or deduction to the extent included in the taxable income of the resident shareholders.17 All other electing S corporations are considered electing standard S corporations. The existing statute providing that the PTE tax for S corporations is computed on the New York source income for both residents and nonresidents applies to electing standard S corporations.18
Special certification and estimated payments for 2022 tax year
While certification to be taxed as an electing resident S corporation normally must be made at the time the PTE tax election is made, for the 2022 tax year, the budget legislation provides that the certification to be taxed as an electing resident S corporation does not have to be made until March 15, 2023.19 Also, to provide transitional relief, for the 2022 tax year, an electing resident S corporation must make estimated tax payments on March 15 and June 15 representing 25% of the required annual payment as if the electing resident S corporation were an electing standard S corporation (rather than 50%).20 However, all electing resident S corporations are required to pay 75% of the required annual payment by Sep. 15, 2022.
Extended election deadline and amended estimated payment provisions for 2022 tax year
As subsequently amended by A.B. 10080 / S.B. 8948, the deadline for making the state PTE tax election for the 2022 tax year is extended from March 15, 2022, to Sept. 15, 2022.21 Again, to provide transitional relief for PTEs that are still considering the election, for PTE tax elections that are made after March 15, 2022 and before June 15, 2022, the electing partnership or electing S corporation is required to make an estimated tax payment with its election of 25% of the required annual payment (rather than 50%). Finally, for PTE tax elections that are made after June 15, 2022 and before Sep. 15, 2022, the electing partnership or electing S corporation must make an estimated tax payment with its election of 50% of the required annual payment (rather than 75%).
New York state individual income tax addback amended
Under existing law, for tax years beginning on or after Jan. 1, 2021, New York state individual income tax law provides for a PTE tax deduction addback equal to the amount of the PTE tax credit.22 Effective retroactively to tax years beginning on or after Jan. 1, 2021, the budget legislation provides that New York PTE taxes as well as similar PTE taxes imposed by other states are excluded from the definition of “income taxes” for purposes of the addback of income taxes to the extent these taxes are added to federal adjusted gross income under the PTE tax addback provision.23
Commentary
New York City has become the first locality to impose a separate city-level elective PTE tax and will likely not be the last. While state PTE taxes have proven to be a popular workaround to the federal SALT deduction limitation, the differing nature of each state PTE tax regime presents complications and uncertainty, even more so when local PTE taxes are layered on. Impacted PTEs should undertake a holistic analysis of all regimes as applied to their entity structure to determine whether an election would be beneficial. It is also important to monitor state and local administrative guidance that continues to be released, given the fact that many legislatures left it to their taxing agencies to implement specific rules for each tax. As with any PTE tax election, entities are strongly encouraged to assess and model the overall tax impact an election could have on its owners at the federal, state, and local levels.
The budget legislation included a welcome change to the state PTE tax regime by adding provisions for electing resident S corporations. In general, electing resident S corporations must file a certification at the time of the PTE tax election, but they have until March 15, 2023, to file a certification for the 2022 tax year. The follow-up legislation extends the time to make a PTE tax election for the 2022 tax year from March 15 to Sept. 15, 2022. Because the budget legislation containing the electing resident S corporation provisions was not enacted until after the original March 15, 2022, deadline, this extension allows resident S corporations additional time to consider and potentially make the election. Also, the estimated tax payment provisions are amended for PTEs that make the election after March 15, 2022. However, the legislation providing for the extension does not allow a PTE that already made the election for 2022 to revisit its decision, as the election remains irrevocable once made.
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