Signed Tax Legislation Amends the Pass-Through Entity Tax

On April 9, New York Governor Kathy Hochul (D) signed tax legislation as part of the State’s FY 2023 budget (hereafter, the “Legislation”). The Legislation amends the State’s pass-through entity tax (PTET) by creating:

1. A new S corporation category for entities with all New York State (“NYS”) resident shareholders; and

2. A new Tax Law (Article 24-B) establishing a New York City (“NYC”) PTET.

Background
Effective for tax years beginning on or after January 1, 2021, NYS enacted the PTET allowing partnerships and S corporations to make an annual election to pay an entity-level tax at rates ranging from 6.85% to 10.9% on the entity’s taxable income. An offsetting NYS personal income tax credit is allowed for the electing partnership’s direct partners or members, and the S corporation’s direct shareholders.

The original law provided that the NYS PTET base for electing S corporations included only NYS source income. Electing NYS PTET partnerships had the same source limitation (i.e., only NYS source income included in PTET base) as electing S corporations, but only with respect to their nonresident partners. NYS resident partners included all of their pro-rata share of the partnership’s income, gain, loss, or deduction to the extent included in taxable income.

New Law
The Legislation amended the definition of an “electing S corporation” (effective for tax years beginning on or after January 1, 2022) to be treated as either an:

1. Electing Resident S Corporation (“RSC”); or

2. Electing Standard S Corporation (“SSC”).

A RSC is required to certify at the time of its NYS PTET election that all of its shareholders are residents of New York. If such a certification is not made, the S corporation will be classified as an SSC. An S corporation that has both NYS resident and nonresident shareholders is classified as a SSC.

For purposes of determining the NYS PTET base:

• A SSC continues to include only NYS source income.
• A RSC includes all items of income, gain, loss, or deduction included in taxable income regardless of the sourcing of such income. The increase in the NYS PTET base for resident shareholders creates a larger federal tax benefit for such shareholders.

PTET Income Tax Addback
Effective January 1, 2021, partners, members and shareholders in an entity that has elected the NYS PTET are required to add to NYS individual taxable income their share of the NYS PTET credit. In addition, NYS resident partners, members and shareholders are required to add to NYS individual taxable income, any other state PTETs in which the partner/shareholder claims a credit for taxes paid to other jurisdictions.

Election
As previously noted, to be considered an RSC, an S corporation must certify at the time of its PTET election that all shareholders are residents of NYS. The NYS PTET election due date for tax year 2022 was March 15, 2022. The legislation provides a one-year transition provision for allowing the 2022 election/certification to be taxed as an RSC until March 15, 2023, instead of the original 2022 NYS PTET deadline of March 15, 2022. However, the 2022 NYS PTET election was not extended. In other words, unless a qualifying entity made the NYS PTE election back on March 15, 2022, such entity would be precluded from electing to be treated as a RSC in 2022.

LATE BREAKING NEWS – Because the Legislation was signed by Governor Hochul AFTER the due date for making the 2022 NY PTET election, many S corporations are now precluded from making the election to be treated as a RSC in 2022.  It appears the NYS Legislature must have heard from many voters about the inequity of the deadline to make the 2022 NY PTET occurring before the passage of the Legislation.  A bill was recently introduced that will extend the March 15, 2022, deadline to make the NY PTET election to September 15, 2022.  While the bill has not yet been signed into law, we understand that there is a good chance it will pass.  Stay tuned.

Estimated Tax Payments
The Legislation also provides some relief for the NYS PTET estimated payments due in 2022. Specifically, an electing RSC is required to make estimated tax payments on March 15 and June 15 representing 25% of the required annual payment as if the RSC was an SSC. However, all electing RSCs are required to pay 75% of the required annual payment by September 15, 2022. 

New York City Pass-Through Entity Tax
Effective for tax years beginning on or after January 1, 2023, the Legislation created a New York City Pass-Through Entity Tax (“NYC PTET”) that is similar to the NYS PTET, with some differences. Specifically:

• The annual NYC PTET election may be made by an “Eligible NYC Partnership” (“E-City-P”) or an “Eligible NYC Resident S Corporation” (“E-R-SC”).
• An E-City-P includes any partnership that has a NYS partnership return filing obligation where at least one partner or member is a NYC resident individual.
• An E-R-SC includes any NYS S corporation that is subject to the NYS Franchise Tax and only has NYC resident individual shareholders.

In order to make the NYC PTET, a qualifying entity must make the NYS PTET election for the same taxable year. The NYC PTET election due date is the same as the NYS PTET election.

The NYC PTET is imposed at a flat rate of 3.876% (the highest NYC personal income tax rate) on all income included in the NYC taxable income of a NYC resident partner/shareholder of the electing entity. A credit is available to NYC resident partners/shareholders against their NYC personal income tax equal to their direct share of the NYC PTET.

The NYC PTET is in addition to the New York City Unincorporated Business Tax on partnerships, and the NYC General Corporation Tax on S corporations. State personal income tax payers are required to add-back any CPTET credit they receive when calculating their state income.

Please reach out to your Citrin Cooperman State and Local Tax Practice advisor or any of the following State and Local Tax Practice professionals: David Seiden at dseiden@citrincooperman.com, Eugene Ruvere at eruvere@citrincooperman.com, Tom Walsh at twalsh@citrincooperman.com, or Jaime Reichardt at jreichardt@citrincooperman.com to discuss the opportunities provided by the amended legislation.