New York Expands PTET Regime and Enacts a PTET Election for New York City

April 2022

BY

Janet Bernier Principal, State and Local Taxes

Nicholas Montorio Managing Director, State & Local Taxes

Ozair Minty Managing Director, State & Local Taxes

As part of its 2023 budget bill, New York state expanded the benefits of its elective pass-through entity tax (PTET) for some resident S corporation shareholders. The budget bill also creates a PTET election for New York City, making it the first U.S. local jurisdiction to offer such an election.
 

State PTET Modifications for S Corporations

Starting with 2022 tax returns, a newly defined class of S corporations is eligible for a broader tax base calculation method, which may increase the amount of tax credit available to such taxpayers that wish to elect into the state’s PTET regime. The original PTET legislation, enacted in 2021 and effective for tax years beginning on and after January 1, 2021, required all electing S corporations to calculate their tax bases using only New York state-sourced items, regardless of the shareholders’ residence status. For multistate entities, the calculation typically results in a lower PTET, which leads to a lower deduction on the federal income tax calculation and also a smaller credit to offset the shareholders’ New York personal income tax liability.
 
The new law defines two distinct classes of S corporations that can make the PTET election: (1) an “electing resident S corporation” and (2) an “electing standard S corporation.” Electing resident S corporations calculate their PTET bases as the sum of all items of income, gain, loss or deduction, to the extent these items would be included in the taxable income of a resident shareholder (i.e., from all sources). Such an approach could result in a greater PTET liability for the electing resident S corporation, thus creating a larger federal state tax deduction and a larger New York state PTET credit for the resident shareholders.
 
Qualifying S corporations that wish to elect into the state PTET regime and calculate their tax bases under the electing resident S corporation rules must “certify” at the time of election that all of its shareholders are residents of New York state. Electing S corporations with both resident and nonresident shareholders (i.e., electing standard S corporations), will continue to calculate their New York state PTET bases using the sum of all items of income, gain, loss or deduction derived from or connected with New York state sources for all shareholders -- resident and nonresident. If an electing S corporation does not certify that is an electing resident S corporation, it will automatically be treated as an electing standard S corporation.
 
These changes are effective for tax years beginning on or after January 1, 2022.
 

Amendments Related to Add-Back of New York State PTET and Other State PTETs

The budget bill also amended and added new provisions to the New York state personal income tax add-back of state income tax expenses. Unlike most other states that have enacted PTET elections, since 2021, New York has required partners and shareholders of electing PTEs to add their PTET credit to their federal adjusted gross income (AGI) starting point when calculating their New York state personal income tax liability. The 2023 budget bill did not change the add-back requirement.  However, it did make significant changes to New York’s state income tax add-back provisions, as follows:
 
  • The requirement for shareholders of an S corporation to add back their share of New York and other state income taxes paid by an S corporation was removed. The only state income tax paid by an S corporation that is still required to be added back by S corporation shareholders is the New York corporation franchise tax that is imposed on federal S corporations that have not made the separate New York state S corporation election.
  • A new provision was enacted that eliminates any requirement for individual partners and S corporation shareholders from adding back the New York state PTET to their federal AGI starting point “to the extent” of their share of the New York state PTET credit that is added to their federal AGI.
  • Likewise, a new provision was also enacted that eliminates any requirement for individual partners and S corporation shareholders to add back their share of “substantially similar” other state PTET, “to the extent” of a partner’s or S corporation shareholder’s “other state tax credit.”
 

New York City PTET Election

Effective for tax years beginning on or after January 1, 2023, the budget bill also created an elective New York City PTET. The New York City PTET mirrors the state’s PTET in many ways, and many provisions have nearly identical language. The election is an annual, irrevocable election that must be made by the due date of the first estimated payment. However, to make the election, partnerships must have at least one member that is a New York City resident and S corporations must have only shareholders that are New York City residents. The New York City PTET rate is 3.876%, and it is levied in addition to any other taxes applicable to the electing partnership (i.e., the unincorporated business tax) or S corporation (i.e., the general corporation tax). 
 
In the case of an “electing city partnership,” the New York City PTET base is the sum of all items of income, gain, loss or deduction attributable to a partner or partners that are “city taxpayers,” including disregarded entities owned by a city taxpayer. For an “electing city resident S corporation,” the base is the sum of all items of income, gain, loss or deduction attributable to the city resident S corporation shareholders.
 
Similar to the state PTET, the New York City PTET is paid in four equal installments as estimated taxes. In addition, the New York City PTET is primarily a liability of the electing entity; however, a member entitled to a tax credit for the PTET is severally liable to the extent not paid by the electing entity. 
 
Resident owners of eligible PTEs that make the election in New York City are entitled to a refundable credit equal to their direct share of the New York City PTET to offset their New York City individual income tax.
 
BDO SALT professionals can help PTEs and New York taxpayers navigate the modified state PTET election regime, as well as eligible PTEs and resident taxpayers evaluate and address the new city PTET. For more information, contact BDO.