With the passing of the Tax Cuts and Jobs Act (TCJA), itemized deductions were impacted both positively and negatively for individuals. Each taxpayer who itemized their tax deductions was limited by the State and Local Tax (SALT) deductions. The SALT deduction was limited to $10,000. Many individuals, especially those who live in high taxing property and income tax states such as New York, were highly affected. These individuals were no longer getting a tax benefit for all the taxes paid during the year.
New York State, as well as other states, came up with a workaround this year regarding the limitation of that tax deduction known as the Pass-Through Entity Tax (PTET). Typically, flow through entities such as Partnerships and S Corporations do not pay any income tax. The income from these entities flows through to the owners and any tax based on the entity’s income is calculated at the individual level.
If a flow through entity elects PTET status, the entity pays the tax on its income at the entity level. The tax paid is a business deduction on the entity thereby reducing the owner’s income that the owner will be taxed on for federal income tax purposes. In addition, the PTET tax paid or accrued by the entity (depending if the entity is a cash or accrual basis tax method of accounting) is subsequently reported on the business owners Form K-1 allocated based on the owner’s percentage of ownership. The amount of the PTET will be reported as a credit on the individual taxpayer’s state tax return and thereby reducing the owners’ state tax imposed for the year.
So, how do you elect PTET status?
The election is an annual and must be made online by business owners before the state’s respective due date. Once elected the entity has an annual form filing requirement and must be filed online as well. The election for 2021 PTET status must have been done online no later than October 15, 2021.
New York State waived the estimated tax payment requirement for the entity for the 2021 year. An entity may choose to make a payment for PTET in December, however they are not required to do so. Penalties will not be assessed if no payment is made by December 31, 2021. A 2021 annual PTET form (for those who elected PTET status) is required to be filed online no later than March 15, 2022. An extension may be filed by this date if information is not available to file or if more time is needed to file a complete and accurate return. The tax is calculated on the New York State taxable income for the entity. Keep in mind, due to the state decoupling from certain federal tax laws, state modifications must be figured in calculating the state taxable income. The state tax rates are varying depending on the entity’s state taxable income. For example, taxable income under $2M is taxed at 6.85 percent and increased from there.
There has been discussion to increase the SALT limitation for itemized deductions to $80,000 for married filing joint taxpayers and $40,000 for single taxpayers. If this is passed, you will want to discuss with your tax professional if it still makes sense and is beneficial to elect PTET status on the entity level for 2022. The 2022 election may be made after January 1, 2022, and on or before March 15 ,2022. The estimated tax requirement has not been waived for 2022 and the entity must make quarterly estimated tax payments otherwise penalties and interest may be assessed if there is an underpayment of the tax based on the 2022 taxable state income. Estimated tax payments are based on an amount equal to at least 25 percent of the required annual payment for the taxable year. The required annual payment is the lessor of:
- 90 percent of the PTET shown on the return for the electing for the taxable year; OR
- 100 percent of the PTET shown on the return of the electing entity for the preceding taxable year.
If the entity did not opt in to the PTET for the preceding year, the required annual payment is 90 percent of the tax reported on the PTET return for the taxable year.
Consult your tax advisor to determine if PTET status is beneficial for your flow through entity business and its shareholders as each taxpayer situation is different and may or may not provide enough tax savings. You should also discuss potential filing and payment requirements.
If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
