NYC Pass-Through Entity Tax: Official Guidance

In September 2022, New York announced legislation moving up the start date of the New York City (NYC) Pass-Through Entity Tax (PTET) from January 1, 2023 to January 1, 2022. In response, the New York Department of Taxation and Finance has updated its online payment system and is now accepting estimates for New York City’s new Pass-Through Entity Tax (PTET).

This elective tax regime, new for 2022, acts as a workaround for New York City residents for the federal $10,000 state and local tax deduction cap. The PTET estimates can be made via ACH credit through a business’s Online Services Account under the estimated payment tab. It should be noted that individual partners and shareholders are still required to make personal city estimates for 2022 regardless of their anticipated credit from the NYC PTET.

New York City Pass-Through Entity Tax FAQs

Below are answers to commonly asked questions when it comes to the NYC PTET. 

Who is eligible to elect into the NYC PTET?

The NYC PTET is only available for partnerships and limited liability companies (LLCs) with NYC resident partners or members, and S corporations of which all shareholders are NYC residents. Nonresidents of NYC will not receive any benefit under the regime because the NYC personal income tax only applies to city residents.

How is the NYC PTET election made?

Similar to the election for New York State (NYS), the Department clarified that the NYC PTET election must be made via a pass-through entity’s (PTE) Business Online Services account. The annual NYC election will be made at the same time as the NYS PTET election.

Are there any prerequisites to making the NYC PTET election?

Yes, opting into the NYS PTET is required to be eligible for the city PTET election. The state’s 2022 election was available until September 15, 2022. 

What is the NYC PTET rate and how is it calculated?

NYC’s PTET is assessed at the highest individual city tax rate, 3.876%, and based on the pro rata share of the NYC resident partner’s, member’s or shareholder’s total income. The PTET payment is passed through as a NYC tax credit to the partner and is also deductible by the pass-through entity for federal tax purposes.

What estimated tax payments are necessary?

Quarterly estimates equal to at least 25% of the annual NYC PTET will be required. To avoid late payment penalties, the annual payments must equal the lesser of:

• 90% of the NYC PTET for the current taxable year; or
• 100% of the NYC PTET of the prior taxable year.

Note, if no preceding year NYC PTET return was filed, then 90% of the current year tax must be paid in to obtain the safe harbor protection. Additionally, taxpayers should be aware that annualizing income to avoid underpayment penalties is not available for NYC PTET purposes.

How is the NYC PTET return filed?

The NYC PTET will be reported with the NYS PTET effectively creating one combined filing for both taxes. Consequently, in order to elect into the NYC PTET, the NYS PTET election is required.

How do NYC residents claim their share of the NYC PTET credit?

NYC residents claim their share of the NYC PTET credit on Form IT-653, Pass-Through Entity Tax Credit, which is attached to their NYS income tax return.

What considerations need to be addressed before electing into the NYC PTET?

Economics should be considered, specifically as the PTET relates to partnerships. Because only NYC residents are eligible for the city’s PTET, special allocations of partnership distributions and expenses will be required to “true up” the non-NYC partners to reflect economic realities for the PTET. This will not be an issue for S corporations since all shareholders must be city residents thereby eliminating the need for special allocations among the shareholders.

Any other considerations to think about?

Yes, the taxability of PTET refunds also needs to be considered. Due to the rate differential between the NYS PTET, calculated on the pass-through entity’s income, versus the lower NYS personal income tax rates for most taxpayers, calculated on one’s pro rata share of income, there is a strong likelihood that many NYC resident partners will have excess NYS PTET credits which can be applied against their NYC tax liability. If they also elect into NYC PTET, this would generate more credits that will ultimately be refunded to them unless they have other sufficient unsheltered income. Such refunds would be subject to federal income tax as an “accession to wealth” negating any real benefit of opting into the NYC PTET.

Example: LLC A, which has 25 equal NYC resident partners, has $25 million of taxable income and elects NYS PTET. Using the state’s highest rate of 10.9%, the PTET liability will be $2,725,000 or a $109,000 credit per partner. Assuming the partners have no additional income aside from their pro rata share of income from LLC A, namely $1,000,000, their NYS tax bracket is 6.85% or approximately $65,760 in tax liability. After applying the PTET credit, each partner is left with an excess credit of $43,240 ($109,000 – $65,760) to be applied against their NYC tax liability of $38,535 resulting in a net refund of $5,705. If LLC A elects into the NYC PTET, each partner would receive an additional NYC credit of $38,760 all of which would be refunded and subject to federal income tax when received. Therefore, the only benefit received will be a timing difference of a deduction in the current year versus a taxable refund in the next year.

With the above questions in mind, a careful analysis is necessary for those eligible to elect into the NYC PTET regime. Now is the time to run projections to estimate the potential for tax savings of opting in. To determine whether the NYC PTET is right for you, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.