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Pass-Through Entity Tax: Considerations for the New Year

The Pass-Through Entity Tax (PTET) is an optional tax that allows an eligible partnership or S Corporation to make an annual election to pay the New York State (NYS) tax at the entity level and the direct individual partner or shareholder of the electing entity will be allowed a credit against the income tax imposed on their New York return. The tax was imposed under Tax Law Article 24-A, which was enacted in January 2021. If you’re not yet familiar with the PTET, you can read further background here.

As we enter the second year with PTET, many unanswered questions remain:

  • “What will the tax return look like?”
  • “Can my tax adviser file the forms on my behalf?”
  • “When will the individual tax forms be updated to reflect credit calculations?”
  • “Will current administration repeal the State and Local Tax limitations and but a kibosh to the PTET regimes around the country?”

While the questions above (as well as others) remain, we do have more clarity as we head into the second year for those businesses considering making the election. The below Q&A is intended to provide a framework as businesses evaluate their tax year 2022 positions.

Q: When can an election be made for tax year ending 12/31/2022?

A: The election can be made anytime between 1/1/2022 and 3/15/2022. There is no extension to make the election. NYS has indicated that the online platform to make the election will be ready by February 15, 2022.

Q: So, can my CPA make the election on my behalf with proper authorization?

A: No. The election has to be made by an authorized Company representative. The election is made after careful consideration with your CPA. Once made, the receipt of the election by the New York State Dept. of Taxation and Finance should be shared with your CPA.

Q: I am not sure if I want to elect the PTET because I don’t know if the entity will have any income. What happens if I make the election and there is no income?

A: An eligible entity can make the election. If there is no taxable income for the year, there will be no tax due. However, the tax return will still need to be filed by the entity. Once the election is made, it is irrevocable for 2022.

Q: My company uses a tax year other than calendar, when do I make the election?

A: For fiscal year businesses the election must be made in the year in which the tax year ends. So, if a company uses a 3/31/2022 year end, the election for the 2021 tax year must be made by 3/15/2022.

Q: My company did not make the election for tax year ended 12/31/2021, can I still make the election?

A: You cannot elect to participate in PTET regime for tax year ended 12/31/2021, but you can elect in for tax year ending 12/31/2022 by March 15, 2022.

Q: My company uses the accrual basis of accounting for tax return preparation, is there anything special I need to do?

A: Yes, reach out to your CPA or one of our tax advisers. Companies preparing their tax returns on accrual basis, may be eligible to claim the PTET credit in a year before it is actually paid. It is important to discuss financial statement considerations if this is the case as the Company will likely have record an expense for financial statement purposes.

Q: What can and should my business do before February 15th 2022?

A: Contact your tax adviser if not already done. There are a few things to consider:

  • Are you eligible to elect into the PTET regime?
  • Is it beneficial to elect into the PTET regime?
  • What are the downsides?
  • Has your account been activated on NYS website to hit the ground running?

There are important administrative and tax considerations to resolve prior to electing in. The decision made at the company level will have real, and often irreversible, impact to business owners. If you need further guidance or have any questions on this topic, we’re here to help. Reach out to your tax adviser or a member of our tax team to see if the PTET election is right for you.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.