The New York State Department of Taxation and Finance released initial guidance last week on the new elective pass-through entity tax on partnerships and Subchapter S corporations (the “PTE Tax”).
Earlier this year, New York enacted the PTE Tax which imposes a graduated income tax (at rates from 6.85% to 10.90%1) on the “pass-through entity taxable income” of any partnership or S corporation which elects to be subject to the PTE Tax. A further discussion of the PTE Tax is available here.
Election Mechanics for 2021
The application of the PTE Tax is elective on an annual basis. Ordinarily, a partnership or S corporation must make an irrevocable election to have the PTE Tax apply for a taxable year no later than the first estimated tax payment date (March 15 for calendar year taxpayers).
However, for 2021, a partnership or S corporation may elect to be subject to the PTE Tax no later than October 15, 2021. The guidance provides that the election is made online by an authorized person for an eligible entity through the entity’s Business Online Services Account.
Estimated Tax Payments for 2021
An electing entity is not required to make estimated payments of PTE Tax for 2021. However, in order to receive a federal tax deduction for 2021, a partnership or S corporation must make estimated payments of PTE Tax before the end of the year. The guidance provides that an eligible entity is permitted to make optional estimated PTE Tax payments prior to the end of the year. While there is currently no mechanism to make such payments, the guidance provides that an online estimated tax application will be available for this purpose by December 15, 2021.
Importantly, partners and shareholders must continue to make individual estimated tax payments for 2021 as if the PTE Tax was not enacted. In other words, for 2021 only, the individual estimated tax payments of the partners and shareholders of an electing entity cannot be reduced by the amount of the estimated PTE Tax payments being made on their behalf. This will result in partners and shareholders effectively paying their New York income tax liability twice during 2021. Partnerships and S corporations (and their partners and shareholders) should be aware of this issue and plan accordingly.
That said, since the amount of PTE Tax imposed on a pass-through entity is creditable by an individual taxpayer against the individual’s New York State personal income tax liability and any excess credit (i.e., the individual’s share of PTE Tax in excess of the individual’s tax liability on the entity’s income) is refundable to the individual taxpayer, the cash flow difference is temporary (extending only until the taxpayer receives a refund of the excess 2021 tax paid after filing his or her 2021 tax return in 2022).
This double payment rule appears to be an issue only for 2021. Beginning in 2022, it appears that individual partners and shareholders can take the amount of any potential PTE Tax credit into account when calculating their estimated tax payments.
Similar Taxes Imposed by Other States
Beginning in 2021, resident partners and shareholders will be allowed a credit against their New York income tax liability for any pass-through entity tax imposed by another state, local government or the District of Columbia that is “substantially similar” to the PTE Tax. A list of substantially similar taxes will be posed by the Department of Taxation and Finance on its website.
While this new guidance from the Department of Taxation and Finance is helpful, taxpayers should be aware of the potential cash flow issues that can arise for 2021 as a result of the double payment of estimated taxes. Taxpayers should be aware of the October 15 deadline for electing application of the PTE Tax for 2021.
We continue to await further guidance from the Internal Revenue Service on various federal issues that arise from the PTE Tax.
For additional information on the PTE Tax, please contact Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Ronald P. Cima (212-574-1471), Daniel C. Murphy (212-574-1210) or Brett R. Cotler (212-574-1269).