Retroactive NYS PTET Change
At the end of the day on September 12, 2022, New York State announced a retroactive change to the tax reporting instructions for the pass-through entity tax (PTET), as well as entities that paid certain taxes to other states, for the 2021 tax year.
There are two categories of entities that are affected by this retroactive change.
First, S corporations that made voluntary estimated PTET payments during 2021 that exceeded their actual PTET liabilities for the 2021 tax years are affected by this change. Such entities would have received a refund when they filed their 2021 PTET annual returns.
Second, S corporations, partnerships or LLCs that made tax payments to other states for income taxes on behalf of their owners and/or entities that made tax payments to other states for PTET in the other state will also be affected by this change.
For S corporations, the instructions for the 2021 Form CT-34-SH, New York S Corporation Shareholders’ Information Schedule, have been retroactively changed. For line 1 of the form, in prior years, entities have been required to include the Article 9-A corporate franchise tax, to the extent that the tax was excluded (i.e., deducted) from federal income, so that owners of the entity would add the amount of the tax back to their income for New York State income tax purposes.
The retroactive change to the instructions for line 1 of Form CT-34-SH now indicates that entities must enter the following taxes, to the extent the tax was excluded (i.e., deducted) from federal income:
1- Article 9-A corporate franchise tax
2- Any amounts paid on behalf of members or shareholders to states that are not substantially similar to New York’s PTET
3- Any amounts paid on behalf of NY nonresidents for pass-through entity taxes that are substantially similar to New York’s PTET
4- Any amounts paid on behalf of NY residents for pass-through entity taxes that are substantially similar to New York’s PTET on income not sourced to the other state under the laws of New York, and
5- Any amount of estimated PTET deducted by the S corporation that exceeds the actual PTET liability for the year. (Do not include the amount of the PTET liability computed on the annual PTET return. This amount will be an addback modification by the shareholders claiming the PTET credit.)
See https://www.tax.ny.gov/forms/corp_up_to_date_info.htm for the updated S corporation instructions.
For LLCs and partnerships, the instructions for the 2021 version of Form IT-204, Partnership Return, have been updated to include the following change: Note: The partnership must provide to each partner a statement indicating the partner’s distributive share of income taxes paid to other states. This statement must itemize the amounts paid to each state.
This supplemental statement does not include any change to specific lines reported on Form IT-204 or Form IT-204-IP, New York Partner’s Schedule K-1.
On the individual income tax returns for the owners of affected entities, the adjustments made for New York purposes must now include the amounts reported by entities under the revised instructions. The instructions for various individual income tax forms have been updated to refer to the changes in information that will be reported by entities.
See https://www.tax.ny.gov/forms/income_up_to_date_info.htm for the updated instructions for partnerships, LLCs and individuals.
The New York State Department of Taxation and Finance has indicated on its website that affected entities that have already filed their entity returns for the 2021 tax year, as well as owners of affected entities that have already filed their personal income tax returns for the 2021 tax year, are required to amend their 2021 returns to reflect this retroactive change in the instructions.
Practitioners should discuss this matter with affected clients, since the decision to amend returns must be made by clients. Clients will need to compare the costs of preparing amended returns to the possible penalties and interest that would result from an audit of originally-filed returns that are not amended. Clients will then need to inform their tax practitioners about whether they wish to retain the practitioners to prepare amended 2021 returns.
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 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.