NY PTET Reminders
November 29, 2022 Update: New York State has changed its position regarding the addback of PTET payments when computing taxable income for PTET purposes. See our post on November 29, 2022.
As discussed on pages 61 through 80 of the Tax Year 2021 M+O=CPE Individual Tax Year-End Workshop Reference Book, entities may elect to be subject to the New York pass-through entity tax (PTET).
For entities that made the election for the 2021 tax year, the annual PTET return must be web filed using the entity’s Business Online Services account on or before March 15, 2022. A six-month extension for filing the return is available, but an entity must still pay at least the amount of tax that it owes by March 15, or it will face penalties and interest when it files the annual PTET return by the extended due date.
As a reminder of what we discussed in our post on January 18, 2022, M + O = CPE, Inc. confirmed with New York State that an entity does not add back any PTET paid through estimated taxes when computing the pass-through entity taxable income for the year.
For example, assume an entity had federal ordinary income of $1 million before paying an estimated tax payment for PTET of $70,000 in December of 2021. (For simplicity, assume that the entity has one owner and has no New York adjustments for things like franchise tax, bonus depreciation, etc.) Since the entity is permitted to deduct the PTET estimated tax payment on its federal return, the federal ordinary income that the entity will report on its federal Form 1120S or 1065 will be $930,000 ($1 million minus $70,000 estimated PTET payment),
When the entity computes pass-through entity taxable income for the purpose of computing its annual PTET return, it will use the federal ordinary income of $930,000. It will not add back the $70,000 PTET deduction when computing its pass-through entity taxable income. Therefore, the PTET tax due on the annual PTET return will be $63,705 ($930,000 x 6.85%).
The entity owes $63,705 of PTET, and it paid $70,000, so that entity will receive a refund of $6,295 ($63,705 tax due minus $70,000 estimated tax paid). This refund will be added to the entity’s federal ordinary income for the 2022 tax year.
The entity will report the PTET credit of $63,705 and its owner will receive a credit for this amount on Form IT-653 of the owner’s 2021 New York personal income tax return. The owner must also add back $63,705 (using code A-219) to New York adjusted gross income in 2021. The addback must always equal the amount of the credit on Form IT-653, and the addback must occur in the same year that the credit is taken.
The fact that entity paid a higher amount of estimated tax for PTET to New York in December does not affect the owner’s personal New York return. The credit and the addback are for the amount of PTET due on the entity’s annual return, regardless of how much estimated tax the entity paid.
If the entity had waited until March of 2022 to pay the PTET instead of paying an estimated tax for the PTET in December 2021, the timing of the addback on the personal return of the owner does not change. The addback on the 2021 personal New York return must equal the amount of the credit claimed on the 2021 personal New York return of the owner.
Some practitioners observe that if the entity does not pay the PTET until March of 2022, the owner of the entity is required to add the PTET credit back to income in 2021, even though the entity received no deduction for PTET in 2021. It is true that the New York rule can result in a mis-timing. The addback on the owner’s personal return may occur in 2021 and the entity may receive the deduction for the PTET payment in 2022. New York State apparently thought that it was better to use a simpler rule that requires the addback and credit to always occur in the same year instead of trying to address the timing of when the entity received the deduction.
Some practitioners also observe that New York’s position that entities cannot add back the PTET estimated tax payment when computing pass-though entity taxable income results in a smaller benefit from the PTET credit than would occur if New York allowed such an addback. This is true, and it is unfortunate that New York has taken that position.
Our earlier posts that discuss the passthrough-entity tax are: February 15, 2022, February 10, 2022, January 27, 2022, January 25, 2022, January 18, 2022, December 16, 2021, December 14, 2021, December 6, 2021, November 11, 2021, September 30, 2021, September 9, 2021, August 26, 2021 and June 3, 2021.