SALT Deduction Limitation Bypass via Pass-Through Entity Tax Election
In response to the $10,000 State and Local Tax (SALT) itemized deduction limitation on individual federal tax returns, certain states began enacting a substitute state-level income tax on pass-through entities (“PTE”). The IRS released Notice 2020-75 which stated the PTE tax would be deductible at the entity level and included as part of non-separately stated income, with the PTE tax payment not being taken into account in applying the SALT deduction limitation to any individual partner/shareholder.
Along with a commensurate response from many other states, New York State has introduced the Pass-Through Entity Tax (“PTET”) allowing eligible “S” corporations and partnerships to pay a state-level income tax previously paid directly by the partner/shareholder on their individual tax return. Eligible partnerships are non-publicly traded partnerships and limited liability companies treated as a partnership. Eligible “S” corporations include limited liability companies treated as an “S” corporation for federal tax purposes. NYS’s PTE tax is effective for tax years beginning on or after January 1, 2021.
How to make the election
The irrevocable election is made annually and is effective for the entire tax year. An authorized person may opt in on behalf of the entity using the entity’s NYS DTF Business Online Services Account. For 2021, this election must be made by October 15, 2021. For subsequent years, the election must be made by March 15 of the current year. This applies to both calendar year and fiscal year filers.
Individuals with the authority to make the election for “S” corporations include officers, managers, or shareholders authorized under law or the entity’s organizational documents. Partners/members with the authority to bind the entity or sign returns may make the election for all other qualifying entities.
No estimated payments are required for the 2021 tax year, but NYS will provide an online estimated payment application in December 2021 for entities choosing to make a 2021 payment. In 2021, personal NYS estimated payments must be paid as though no PTE credit will be received. This will result in an overpayment of 2021 NYS taxes which will be refunded upon filing your 2021 NYS personal income tax return.
After 2021, the lesser of 90% of the current year tax or 100% of prior year tax based on entity income must be paid in four equal estimated payments. All entities regardless of year end must pay estimated payments on March 15, June 15, September 15, and December 15. These payments will only apply to PTET tax. No transfers can be made between related entities or individual accounts and underpayments or late payments will be subject to penalties and interest.
The PTET return
A NYS PTET return is filed online annually for all electing entities on March 15. Fiscal year filers compute PTE taxable income based on the fiscal year ending within the PTET calendar year. An online request for a six-month extension can be made by March 15.
For additional guidance, please see our complete memorandum and the NYS Department of Taxation and Finance website. Your LSZ tax professionals have been hard at work to determine your entity’s eligibility and the impact to your personal taxes. Each client’s situation is unique, as partner/shareholder residency status and allocation of entity income by state all play a significant role in the calculation. Our team will be in touch with you directly to review the calculation and assist you in making the 2021 election by the October 15 due date if applicable.