Most companies operate as pass-through entities. Under a pass-through entity structure, tax authorities don’t tax the owner’s earnings at the business level. Instead, owners and shareholders pay the taxes at the individual level according to their tax rates. Pass-through entities include sole proprietorships, limited liability companies, partnerships, and S-corporations.
Recently, New York State enacted new legislation allowing partnerships and S-corporations to elect to pay an optional pass-through entity tax (PTET). Organizations calculate the PTET at the business level, and members, shareholders, and partners receive a credit for the tax payment they can apply to their personal New York taxes. In addition, the organization receives a tax deduction for the amount of the PTET tax, which is also passed-through to its owners or shareholders. The new tax law is beneficial because it allows owners and shareholders to effectively receive a greater tax deduction for state taxes than would be allowed without the PTET tax (since the deduction for personal state taxes is limited). Since owners/shareholders receive a credit on their personal New York tax return for the amount of the PTET tax paid to the state, the PTET tax is a net wash but the tax deduction for the payment of the PTET remains.
How Do I Elect the Pass-through Entity Tax?
New York has strict procedures in place for electing the pass-through entity tax. Only individuals who have the authorization to sign the company’s tax returns can elect to pay the pass-through entity tax. The election must be made during a specific time frame and is irrevocable for that tax year once chosen.
Partnerships and S-corporations who file their taxes on a calendar year basis must make the election between January 1 and March 15 of the given year. Those organizations that use a fiscal year basis must make their election before the end of their fiscal year.
All partnerships and S-corporations who wish to pay the pass-through entity tax must make their election annually. New York requires authorized individuals to make the election online through the entity’s Business Online Services account.
Are Estimated Pass-through Entity Tax Payments Required?
Yes. The S-corporation or partnership must make estimated pass-through entity tax payments each quarter. The tax payments are due on March 15, June 15, September 15, and December 15. If the estimated payment deadline falls on a weekend or legal holiday, it is due on the next business day.
Estimated payments must be equal to 25% or more of the prior year’s pass-through entity tax. If the business did not elect to pay pass-through entity tax in the preceding year, the estimated payments must be 90% or more of the organization’s annual pass-through entity tax due.
When Is the Annual Pass-through Entity Tax Return Due?
Organizations that elect to pay pass-through entity tax must file annual returns by March 15. The annual return must include the names and identifying information of all members, partners, or shareholders of the entity who are eligible for the pass-through entity tax credit on its annual return. Entities who follow a fiscal year reporting calendar must file their returns by March 15 of the following year. If March 15 falls on a weekend or legal holiday, it is due the next business day.
Who Is Eligible for the Pass-through Entity Tax Credit?
Members, partners, or shareholders of a New York S-corporation or partnership are eligible to claim the pass-through entity tax credit provided they are full-time residents of New York. Only individuals who pay New York taxes are qualified for the tax. Part-year residents cannot claim the credit. The member, partner, or shareholder must receive the pass-through entity tax credit from a qualified S-corporation or partnership that has elected to pay pass-through entity tax.
Our Firm Can Help
Pass-through entity taxes offer a new opportunity for businesses and individuals alike. The Law Offices of Lawrence Israeloff can assist any business in New York that wants to take advantage of the PTET. For help navigating your unique situation, call us at (516) 537-4440 today.