The New York Pass-Through Entity Tax (PTET) was passed nearly 10 months ago, and we are now seeing how the NY Department of Taxation and Finance (DTF) intends on administering the new, elective tax. This new tax is a way for smaller businesses (and even some larger ones) in New York to work around the federal law changes that took away previously available tax deductions for state income taxes. (Please review our previous guidance).
Further information is now available about the PTET, including the logistics of filing and the administration of the tax. Where questions remained, our team reached out to the DTF for answers.
Filing of PTET Annual Returns: Web Application Required
Based on information recently posted on the DTF’s PTET website, it appears that the DTF will be requiring electing entities to file annual PTET returns via a web-based application. Entities may not print and mail forms in and commercial software will not be available for paid tax return preparers to prepare and file PTET returns for them as they do with most other tax filings. Unfortunately, this makes New York an outlier when compared to other states that have enacted similar taxes over the past few years and allow PTE returns to be prepared and filed by paid preparers.
Entities with more than 100 investors will be required to upload a data file via the online application. That data must be organized in a very specific way and must include each investor’s name, tax ID number, ownership percentage, PTET Credit amount and residency status.
Entities with less than 100 individual investors may instead manually key in investor data in the online app.
Once a PTET return is filed and the investor data is provided, it CANNOT be changed. Therefore, it is vitally important that the correct amounts of PTET are calculated, and investor PTET credit information is provided and carefully reviewed via the online application before submitting.
Electing entities will be able to file for an extension of up to six months via the NY DTF’s website application. Also, taxpayers should note that March 15, 2022, is the deadline to pay the tax for 2021, elect-in to the tax for 2022 and make the entity’s first estimated tax payment for the 2022 tax year. All of these functions must be performed via the web application on the DTF’s website.
Administration of the Tax
In addition to the above guidance on filing returns on the DTF’s website, we have created a Q&A based on our submitted questions and DTF’s responses to them regarding their administration of the tax:
Q. Are partnerships that elect-in to the tax still required to make estimated tax payments on behalf of non-resident individual partners?
A. For tax years beginning on or after Jan. 1, 2022, electing partnerships are required to make estimated PTET payments based upon estimated total PTET due for the year. These payments may reduce the amount of estimated tax otherwise required to be paid using Form IT-2658.
The Takeaway – This should hopefully eliminate non-resident estimated tax filings for most partnerships that elect-in to the PTET for 2022.
Q. If an electing-entity overpays its tax, may it elect to apply the overpayment toward its estimated tax liability for the following year?
A. There will not be an option to apply overpayments to the next tax year or to any other tax type.
The Takeaway – While this guidance could (hopefully) change, it is disappointing to see because it creates additional administrative burdens. Accordingly, it appears that taxpayers will need to pay in the full amount of their first quarter’s estimate as a separate payment and cannot roll it into the extension payment like we typically do with most extension payments.
Q. Are electing entities that earn income unevenly throughout the year eligible to calculate and pay estimated tax using the annualized income method?
A. The provisions of Article 22 will apply to estimated tax penalties, except where otherwise inconsistent with a provision of Article 24-A. This includes the annualized income installment provision of section 685(c)(4).
The Takeaway – Based on this guidance, it appears that Pass-Through Entities that earn income unevenly throughout the year will be able to pay in 2022 estimated taxes based on the actual liability as of the payment date.
Q. Is a “double add-back” of the PTET required at the individual investor level, first as an add-back of an income-based state or local income tax and again as an add-back of the PTET Credit?
A. The amount of the PTET credit claimed by the partners, members or shareholders on their New York income tax returns must be added back only once, at the individual level, under Tax Law section 612(b)(43) using Form IT-225, New York State Modifications.
The Department’s Office of Counsel has determined that the add-back of taxes paid to the state or other taxing jurisdictions, as required by Section 612(b)(3) under Article 22 of the Tax Law, does not include PTET paid by the pass-through entity under Article 24-A.
The Takeaway – This is welcome news, as many of us were concerned that in enacting the tax, the NY Legislature may have purposefully inserted a “double” add-back provision, thereby effectively increasing the NY taxable incomes of individual investors in electing pass-through entities.
If you have any questions regarding the NY Pass-Through Entity Tax, please contact us.