NYS Pass Through Entity Tax - Explained

Background Historically before the 2017 Tax Cuts and Jobs Act an individual was allowed to itemize the amount State and Local taxes that they paid to the government during the year as a deduction. When those tax law changes came into effect, the maximum amount of State and Local taxes that could be deducted were capped at $10,000 if married (and $5,000 if single) for the year. State and Local taxes include most notably: Income taxes paid to NYS, and Property taxes on your personal residence. As you might imagine, the $10,000 / $5,000 threshold is reached pretty regularly, and this limits the amount of money that can be deducted as an itemized deduction on schedule A of your personal tax return. Because of this, most taxpayers have to use the standard deduction which provides the best benefit. Changes With this new tax law change, NYS is allowing S-Corporations and Partnerships to pay the income tax that would normally be due on the income provided by the business before the end of the year (if cash basis) or accrue for the NYS tax liability as an expense (if accrual basis). The result of this transaction is that the payment would lower your total business income for the current year - therefore you would pay less Federal Income taxes on your personal income tax return by virtue of showing a lower profit from your business. Subsequently, when you file your personal tax return, you will then receive a dollar for dollar credit reduction in taxes for the prepaid NYS taxes on your personal tax return. Example - here is how the numbers could fall For example, if your business is showing net income from operations of $100,000: NYS PTET tax would be 6.85% = $6,850 in estimated taxes paid before the end of 2021. New net income from the business would be: $93,150. Estimated tax savings at 22% tax bracket would be: $1,507 in Federal Income Tax. NYS credit would be received on your personal income tax return for $6,850 when filed by 4/15/22. To take advantage of this change you must make the election and notify NYS that we are opting in to this optional tax by 10/15/21, and then annually by 3/15 for all subsequent years. Please note that this election will need to be made by you individually, and the NYS Department of Taxation is advising only Shareholders and Authorized managers to make the election, therefore your tax accountants will NOT be able to make this election for you. The website to make the election is: https://www.tax.ny.gov/bus/ptet/. Click on "Election" - then follow the links to log in or Create an account to your NYS Business Account. To opt in to the PTET: Log in to the eligible entity's Business Online Services account. Select the ≡ Services menu in the upper-left corner of the Account Summary homepage. Select Corporation tax or Partnership tax, then choose PTET web file from the expanded menu. On the Form Selection page, choose Pass-Through Entity Tax PTET Annual Election.