Important Updates for New York’s Pass-Through Entity Tax

We have been trying to keep up with all of the questions from clients and practitioners regarding New York’s Pass-Through Entity Tax (PTET) with the deadline for making the 2021 annual election looming on October 15. We published a handy list of FAQs in State Tax Notes, covering the nuts and bolts of the PTET, state credits and the federal deduction. We followed up with our blog post here after NYS published some PTET guidance in late August. But, of course, new questions keep arising. 

Based on discussions internally, with other SALT practitioners, and with NYS representatives who were actively involved in the PTET legislation and guidance, we wanted to add a few more FAQs to our list.

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New York Issues Guidance on Pass-Through Entity Tax

For months we’ve all been waiting for the Tax Department to issue guidance on New York’s new Pass-Through Entity Tax (PTET), since the legislation passed in April 2021.  And with the deadline to elect into the tax on October 15, 2021, little details—like how to actually make the election—remained up in the air!  We did our part, with a recent article in Tax Notes State asking and answering some FAQs, but finally yesterday the Tax Department issued its own guidance, in the form of a technical services memo, entitled TSB-M-21(1)C, (1).

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Corporate Partners: Beware of New York’s Changes to its Draft Regulations!

One of the least discussed but critical aspects of New York’s corporate tax reform is the impact on corporate partners who do not engage in business in New York other than by virtue of its ownership interest in a partnership doing business in New York. The combination of the laws governing corporate partners, and recent proposed interpretations of those laws in the newest revisions to New York’s draft regulations should give a corporate partner pause as to its New York tax exposure.

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New York City Finally Releases Guidance on Impact of TCJA Business Interest Deduction Limitations on City Business Income Tax Returns

New York City corporate tax returns have already been filed for the 2018 tax year and NYC unincorporated business tax (UBT) returns are due October 15th. But barely a week before the UBT filing due date, on October 8, 2019, NYC released its long-awaited guidance (https://www1.nyc.gov/assets/finance/downloads/pdf/fm/2018/fm-18-11.pdf) on the attribution of interest deductions for taxpayers whose interest expense deduction was limited under Section 163(j) of the Internal Revenue Code, enacted as part of the Tax Cuts & Jobs Act (TCJA). Under that provision, a taxpayer’s deduction for business interest expense is limited to 30% of adjusted taxable income except in certain circumstances. Any unused interest expense may be carried forward to the following tax year. Note that the NYC Finance Memorandum is numbered 18-11, suggesting that it was originally intended for release in late 2018.

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Decoupling for Trusts and Estates and Other Disallowances Included in Last Minute Revisions to Budget Bill

On March 31^st  an agreement was announced on the FY 2020 Budget. We wrote about the tax related highlights of the budget proposal when it was released back in January. We also recently commented here about the mismatch between the treatment of itemized deductions for individuals versus trusts. Recent guidance from the Tax Department clarified that individuals could itemize deductions at the state level even if they took the standard deduction on their federal return and could take deductions for items disallowed at the federal level. Initially, this seemed to only apply to only individuals, and not trusts and estates.

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Mismatch for Decoupling in New York: Trusts and Estates Not Covered!

A few months ago, we wrote about the recent guidance that the Tax Department issued about itemized deduction decoupling (TSB-M-18(6)). The guidance addresses New York State’s decoupling from the federal treatment of deductions for individuals, but it was not initially clear whether these changes also apply to trusts and estates.

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Regarding Hurricanes Harvey and Irma and their Impact on New York Residency

Clients who are domiciled in Texas, Florida, and US Virgin Islands may end up spending additional time in New York this year, due to Hurricanes Harvey or Irma. Those affected might be concerned about the impact of that additional New York time on their New York residency situation. Clients should be aware that the New York State Department of Taxation of Finance has not put out any information to taxpayers affected, or potentially affected, by these storms. To our knowledge, the Department has never issued an official policy regarding the treatment of days spent in New York due to a mandatory evacuation from a primary residence in another state, or damage to that residence.

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Give your feedback on draft of new Corporation Franchise Tax Regulations

The New York State Department of Taxation and Finance has been drafting new Corporation Franchise Tax Regulations to incorporate the changes made by the corporate tax reform legislation that went into effect in 2015. 

The newest draft regulations address net operating losses carried forward from pre-2015 tax years. In order to preserve the value of unused NOLs that arose prior to 2015, New York has created a prior net operating loss conversion (PNOLC) subtraction pool that can be applied against apportioned income in post-2015 tax years.

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Corporate Tax Reform FAQs

Since the new corporate tax reform went into effect on January 1, 2015, the New York State Department of Taxation and Finance has been providing “general guidance” -- answers to frequently asked questions (FAQs) -- on topics of interest to taxpayers. Recently, the Tax Department clarified two administrative issues with combined filing under the new regime and issued an FAQ with respect to the proper completion of the apportionment schedule on the return.

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Attention Hedge Fund Investment Advisors: Connecticut Court Permits Credit for Taxes Paid on Carried Interest

On March 7^th, a Superior Court in Connecticut issued a decision that could have a significant impact on some investment fund managers who live in Connecticut but manage funds in other states. In Jonathan A. Sobel v. Commissioner of Revenue Services, the Judge held that investment (and therefore intangible) income received by Mr. Sobel, a partner in a partnership that served as the general partner and advisor of certain investment funds, was New York source income and therefore Mr. Sobel could claim a credit on his 1997 and 1998 Connecticut resident tax return for taxes paid to New York (yes, the case has been going on that long!).

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