NYS PTET Calculation Change
New York State has changed its position regarding the addback of passthrough entity tax (PTET) payments when computing taxable income for PTET purposes. Now, its frequently asked questions (https://www.tax.ny.gov/bus/ptet/faq.htm) have been updated as follows:
“For PTE taxable income computation purposes only, an entity must add back all pass-through entity taxes paid and deducted for federal purposes in the current year, including taxes paid to New York or to other jurisdictions.”
For the 2021 tax year, New York State had indicated that PTET was not added back, so this new position represents an important and beneficial change.
As an example of the effect of this change, assume an entity had federal ordinary income of $1 million before paying an estimated tax payment for PTET of $68,500 during 2022. (For simplicity, assume that the entity 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 $931,500 ($1 million minus $68,500 estimated PTET payment).
Using the new position set forth by New York State, when the entity computes pass-through entity taxable income for the purpose of computing its annual PTET return, it will start with the federal ordinary income of $931,500 and add back the $68,500 PTET deduction when computing its pass-through entity taxable income. Therefore, the PTET tax due on the annual PTET return will be $68,500 ($1,000,000 x 6.85%).
When computing taxable income for PTET purposes, the addback, which is now permitted by New York State, causes the PTET tax due on the annual PTET return to be higher (i.e., it is computed using the $1,000,000 and not the $931,500). The higher PTET owed by the entity results in a higher credit available for the owner(s), so this is a beneficial change.
Our tax news has numerous other posts related to the pass-through entity tax. Search our tax news archive for PTET to see these earlier posts.
We will discuss this and other changes to the PTET for the 2022 and 2023 tax years in our upcoming seminars in December and January. If you are not already registered, register here.