It’s Official: New York City Pass-Through Entity Tax Retroactive to January 1, 2022

As we reported here several months ago, this year's New York State budget included a provision for a New York City Pass-Through Entity Tax, effective in 2023, that would allow New York City resident owners of pass-through entities to benefit from a local Pass-Through Entity Tax regime. Shortly after it was passed, many wondered why there was only a prospective effective date. Given that a change like this should be net neutral to the State and City government, why not make it retroactive to January 1, much like the State Pass-Through Entity Tax was made retroactive when it was put in place in 2021?

After several months of continued discussions on this issue, the State legislature acquiesced. As part of a tax nexus bill signed last week by the Governor (that conformed New York City's corporate tax nexus provisions to the same market-based sourcing rules that apply for State corporate tax purposes), provisions were included to change the effective date of the City's Pass-Through Entity Tax to January 1, 2022. Link to the bill here.

Perhaps this not so great news for the accountants and advisors who will now have to scramble to figure out how to elect into this tax and how to handle 2022 estimated tax payments! But this is obviously great news for impacted New York City residents. 

As for timing, elections, estimated tax payments, etc., details are sketchy. But we do know that to qualify for the 2020 NYC PTET, the taxpayer must have a State election in place by the September 15, 2022 due date. Plus, the legislation requires that taxpayers still need to make estimated tax payments to the City for 2022 as if no election was or will be made—the same type of double-payment system that the State had in place in 2021, the first year of its PTET regime. We'll have to wait to see further guidance.

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