New York provides pass-through entity election relief

| 5/19/2022
New York provides pass-through entity election relief

This spring, New York made two changes to the pass-through entity (PTE) election that will give all taxpayers more time to file the election for 2022 and provide relief to S corporations that can certify that all their owners are New York residents. The PTE-level tax election is intended to allow partners or shareholders of certain eligible entities to get the benefit of deducting state and local taxes in excess of the current $10,000 limitation for federal income tax purposes.

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Extension of 2022 PTE election due date

On May 6, 2022, New York Gov. Kathy Hochul signed Senate Bill S8948, extending the due date for making the New York PTE election for the 2022 tax year to Sept. 15, 2022. Prior to the new law, the PTE election for the 2022 tax year was required to be filed by March 15, 2022.

For 2022 PTE elections made after March 15, 2022, to be valid, entities will be required to make an estimated tax payment as follows:

  • For a PTE election made after March 15, 2022, and before June 15, 2022, the electing entity must make an additional estimated tax payment with its election equal to 25% of the PTE tax due for 2022.
  • For a PTE election made after June 15, 2022, and before Sept. 15, 2022, the electing entity must make an additional estimated tax payment with its election equal to 50% of the PTE tax due for 2022.

PTE election relief for certain S corporations

As originally enacted, the PTE election treated partnership and S corporation owners differently. Under the law, a partnership making the election calculated its PTE tax based on all income flowing to New York resident partners (including each resident partner’s share of non-New York sourced income). In contrast, S corporations making the election calculated the PTE tax based only on income apportioned to New York. This meant that income of New York resident shareholders sourced outside of New York was not included in the PTE tax computation. As a result, electing S corporation shareholders might not have received the full federal benefit of New York’s $10,000 state and local tax cap workaround. 

A provision enacted as part of the fiscal year 2023 budget passed on April 8, 2022, provides relief for New York resident shareholders of S corporations who have non-New York sourced income. Under the provision, an S corporation that can certify that all its shareholders are New York residents (referred to as electing resident S corporations) can calculate the PTE tax based on all income flowing to its shareholders (including each resident partner’s share of non-New York sourced income). An electing resident S corporation must pay 75% of its 2022 PTE tax due by Sept. 15, 2022. An S corporation with all New York resident shareholders making the PTE election has until March 15, 2023, to file the certification for 2022. 

Takeaway

Partnerships and S corporations that did not previously make the New York PTE election for the 2022 tax year have extra time to do so. For S corporations, there might be added incentive to make the PTE election if all their shareholders are New York residents. However, computing the PTE tax can be complex, and paying estimated tax might make the election less attractive. PTEs that did not previously make a PTE election should consult with their tax advisers to evaluate whether a PTE election makes sense for the entity and its owners in light of these changes.

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Jon Cesaretti
Principal, SALT Credits and Incentives Services Leader
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