The New Pass-Through Entity Tax
On April 19, New York Governor Andrew Cuomo signed the state’s 2021/22 budget (S2509C) into law.
This comprehensive budget legislation included several changes to personal income tax for higher wage earners, sales and use taxes, corporate franchise tax rate for taxpayers with a taxable income above a certain threshold, reinstating the capital base tax, and other tax changes. In addition to these provisions, one of the highly anticipated changes in the budget is the creation of the new Pass-Through Entity Tax.
The Pass-Through Entity Tax is an entity-level tax that eligible partnerships and New York S corporations can elect to pay on their taxable income for taxable years of the partnership or S corporation beginning after Dec. 31, 2020. Direct partners and shareholders of electing businesses receive a credit against their New York State personal income tax liability for their share of the entity-level tax paid. Any excess credit is refundable. In computing their taxable income for New York State personal income tax purposes, the credit is added back to a partner’s or shareholder’s income. As a result, the net effect of the Pass-Through Entity Tax would be approximately the same as if the election to pay the tax were not made.
Here are a few other things to know about the Pass-Through Entity Tax:
· It allows for a credit of 100% of the distributive share of the PTE taxes paid by an eligible partnership or S corporation on behalf of the individual partner, member or shareholder.
· An eligible partnership is any partnership (other than publicly traded partnerships) with a New York State resident partner or income from New York sources that has a NY State filing requirement. An eligible partnership includes a limited liability company and any entity that is treated as a partnership for federal income tax purposes. An eligible S corporation is a corporation treated as an S corporation for federal income tax purposes with a valid New York State S election in effect.
· An eligible partnership or S corporation that elects to pay the PTE tax must make an annual election by the due date of the first required estimate for the taxable year (March 15 for a calendar-year taxpayer). This annual election is unchangeable.
The provisions for the New York State PTE tax will be incorporated into New York Tax Law Sections 860-866 and can be found in Part C of the budget bill. Contact Bovell Financial for questions or concerns about these new tax changes so we can help guide you in the right direction.
Bovell Financial | 05/05/2021