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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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Ariele Doolittle
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Finally…….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).

Big picture: The memo provides a good summary of the new tax, as well as many helpful examples.  But other than finally providing access to the form to make the election (which is on the website, not actually in the memo) and allowing for early payment of the tax in 2021, there’s nothing particularly new or earth-shattering here. 

Here’s our quick take on the highlights:

  • How to Apply: Kind of important, right?  The only way to apply is ONLINE, through the Tax Department’s Online Business Account Service.  If your client does not have one, get one.  Click here to get access to the application.  And although not new, the memo reminds taxpayers that for 2022 and later, the annual election may be made online on or after January 1 but no later than March 15.  Practitioners need to remember that there’s no October deadline next year!
  • Who Can Apply:  Only an authorized person may make the PTET election on behalf of an eligible partnership or S corporation.  According to the Department’s website, tax professionals may not make this election on behalf of their clients. 
  • When to Pay the 2021 Tax? This actually is a big deal.  As we hoped, the Tax Department promised to make forms available (online only) to pay the 2021 tax early, in December 2021, which is necessary in order for certain taxpayers to get the needed federal tax benefit in 2021.  The current law called for payment of the 2021 tax in March 2022, which would have been a problem for cash-basis taxpayers looking to get a 2021 deduction.
  • Estimated Tax Relief? Nope!  We know many were hoping that the Tax Department would allow some relief on estimated taxes.  Under the law, partners or shareholders in pass-through entities who expected their firms to elect into the program in 2021 and pay the tax are still required to pay-in their estimated income taxes as if their firms were not going to make the election.  This ends up giving the State a nice float of extra taxes for several months, since partners are supposed to pay-in all of their estimated taxes as normal and their firms will be paying the full entity taxes by the end of 2021.  Taxpayers will have to wait until they file their 2021 taxes, in April or October, to get big refunds of their estimated taxes.  Some had hoped the Tax Department might be able to ease up on this, since most taxpayers have already paid in a lot of their 2021 estimates already.  But unfortunately, no relief was provided for this in the memo, and in fact the Tax Department doubles down on the issue, reminding taxpayers that this double-payment regime will stay in place.  This is only a 2021 issue, though; next year, only the entity will have to pay the tax. As for that…….
  • Required PTET estimated payments beginning in 2022. For PTET tax years beginning on or after January 1, 2022, an electing entity is required to pay estimated tax on the amount of PTET calculated for the current taxable year using the online application.  Estimated payments are due on or before March 15, June 15, September 15, and December 15 in the calendar year prior to the year in which the due date of the PTET return falls.
  • Claiming the PTET credit. Eligible taxpayers that receive a PTET credit from an electing entity may claim the credit on Form IT-653, Pass-Through Entity Tax Credit, and attach it to their New York State personal income tax return.  The Department has not released a version of Form IT-653 to the public yet. 
  • Resident tax credits.  The memo confirms that, beginning this year, resident partners, members, or shareholders will be allowed a resident tax credit against their New York State personal income tax for any pass-through entity tax imposed by another state, local government, or the District of Columbia, that is substantially similar to the PTETThis has been a source of some concern (“what does substantially similar mean?”), but the memo notes that the Department will post a list of substantially similar taxes that qualify for the resident tax credit on its website at some point.  Ideally that would happen before October 15th, when taxpayers need to decide whether to opt in.  If a resident of another state can’t get credit for the PTET paid by the entity, this set-up is a really bad deal for that taxpayer, since they will bear the burden of the PTET on their share of the entity’s income and still bear a state tax burden in their home state.  Not good!
  • Classification of partners. Before computing its pass-through entity taxable income, an electing partnership is required to classify all direct members or partners that are taxable under Article 22 as a resident or nonresident of New York.  As we know all too well here, residency determinations can be difficult!  And members or partners may not be classified as part-year residents for PTET. 
    • A member or partner should be treated as a resident if they are a resident of New York for New York personal income tax purposes for at least half of the year.  All other members or partners should be treated as nonresidents.
    • If a member or partner is a trust, the electing partnership must classify the trust as a resident or nonresident of New York State based on the residency status of the trust and not of the beneficiaries.
  • The Investment Income Question Unanswered. There has also been a lingering question as to whether firms with substantial investment income can benefit from the new program.  There appears to be nothing in the PTET that would prohibit an entity from electing into the program and paying tax on investment income.  Yet there has been speculation as to whether such tax payment would be allowed as a deduction for federal tax purposes.  Although many practitioners are confident that the deduction will be available at the federal level, the Department’s guidance did not address this federal tax issue.

As always, stay tuned here for more updates!

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