Commonly Asked Questions About the NYC Pass-Through Entity Tax

Last month, 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 State (NYS) Department of Taxation and Finance stated that it will be notifying taxpayers when the city’s PTET election is available. As we wait for this notification, below are answers to your questions about 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.

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. However, if you missed the NYS election deadline there is currently no relief opportunity for NYC PTET.

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.

When must an estimated 2022 NYC PTET payment be made by?

Although the NYC PTET forms have not yet been released, New York has posted that no NYC PTET payments are required prior to March 15, 2023. However, cash basis taxpayers must remit an estimate on or before December 31, 2022 to be deductible on their 2022 federal tax return. At present, we are waiting for guidance from New York as to the mechanism to make this payment.

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.

What is the interplay between the NYC PTET and the NYC Unincorporated Business Tax (UBT) which also provides a credit to city residents?

Electing into the NYC PTET does not negate the requirement for a partnership or LLC to file a UBT return. In fact, opting into the NYC PTET will actually result in more taxes owned to NYC by the pass-through entity, specifically the 4% UBT plus the 3.876% PTET (7.876% combined!). Furthermore, after claiming the resident UBT credit, NYC residents have a lower tax exposure, leading to an even bigger excess PTET credit which will be taxed when refunded in the following 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.