Last year, NYS provided a tax bill that allows owners of eligible entities to deduct a larger portion of their NY state income tax through their business. This was designed to help offset the SALT tax that has been a popular legislative topic. Many surrounding states have this already in place, but what is unique for NYS, is that you have to OPT IN, rather than opt out. We will be hosting a webinar to discuss in detail: what this election is, who is eligible, and what they need to do.
What is a PTE Tax Election?
The Pass-Through Entity (PTE) tax is an optional tax that partnerships or New York S corporations may annually elect to pay on certain income for tax years beginning on or after January 1, 2021. If an eligible partnership or S-Corp elects to pay the PTE tax, its partners, members, or shareholders subject to tax under Article 22 (personal income tax) may be eligible for a PTE tax credit on their New York State income tax returns.
Essentially, the PTE tax functions as a workaround to the state and local tax (SALT) itemized deduction cap created under the Tax Cuts and Jobs Act (TCJA). If you own a business, opting in to pay this tax may enable you to avoid the $10,000 limit on state and local tax deduction on Form 1040, Schedule A. By allowing shareholders or partners to report pass-through income on the entity, instead of individual-level, PTE tax laws let businesses avoid the $10,000 cap.
What are the Benefits of a PTE Tax Election?
The most apparent benefit of the PTE tax election is the ability to sidestep the $10,000 SALT deduction cap. Plus, the tax is not subject to Alternative Minimum Tax (AMT) which applies (in addition to regular income tax) to certain individuals, estates, and trusts of high income. And, to avoid double taxation at the state level, the owners receive a credit against their state income taxes in line with the PTE tax paid.
Who is Eligible?
Entities taxable as partnerships or New York State S corporations are eligible for the PTE tax election.
- Partnerships, excluding publicly traded partnerships.
- Limited liability companies (LLCs) that opt for treatment as partnerships for tax purposes, excluding single-member LLCs.
- New York State S corporations.
- LLCs that opt for treatment as S corporations for tax purposes and whose shareholders are solely individuals.
When and How Do You Opt In?
For PTE taxable years 2022 and later, eligible entities must opt in on or after January 1st but no later than March 15th. The election must be made online and is irrevocable. Entities can only make one election during each calendar year.
Keep in mind, your tax professional cannot make this election for you. Only authorized persons can make this election on behalf of the eligible partnership, S-Corp, or LLCs that act as partnerships for tax purposes. For partnerships, an authorized person includes any member, partner, owner, or other individual with authority to bind the entity and sign returns under Tax Law §653. For New York S corporations, an authorized person includes any officer, manager, or shareholder of the New York S corporation who is authorized under the law of the state where the corporation is incorporated or under the S corporation’s organizational documents to make the election. The authorized person will need to create and log into their Business Online Services account to make this election.
Is the New York State PTE Tax Election Right for You?
There are significant savings the PTE tax election offers, but there are important cash flow and strategic tax moves to evaluate first. Speak with your financial advisor and tax professionals to determine whether the election is right for your situation.
Ready to Learn More?
Join the Trivium Point team for our exclusive PTE Tax Election Webinar this Tuesday, March 8th from 6:00-7:00 pm. It will be held virtually through Zoom. All interested parties—clients and future clients alike—are welcome to attend. Register here to reserve your spot.