NYC Pass-Through Entity Tax: Official Guidance

It looks like our previous alert regarding New York City’s (NYC) Pass-Through Entity Tax (PTET) got the attention of the Department of Taxation and Finance (Department). A few days after releasing our alert, official guidance was finally issued by the Department. Its memorandum echoes our comments about the NYC PTET and provides some additional insights as explained below.

How is the NYC PTET election made?

Similar to the election for New York State (NYS), the Department has clarified that the NYC PTET election must be made via a pass-through entity’s (PTE) Business Online Services account. For 2022 only, PTEs have until March 15, 2023 to opt in. In future years, the annual NYC election will be made at the same time as the NYS PTET election.

Are NYC PTET estimates required?

As we reference in our previous alert, for 2022, NYC PTET estimates are not required. However, the Department did acknowledge that an optional estimate can be made by December 31, 2022 in order to allow for a federal deduction in the current year.

If an optional 2022 estimate is remitted, can one reduce their 4th quarter NYC personal income tax estimate?

Unfortunately, no. Pursuant to the guidance, NYC residents must continue to pay 2022 estimated taxes as if they are not entitled to a NYC PTET credit. This is similar to how NYS implemented its PTET regime in its first year of operation.

What estimated tax payments are necessary in 2023 and beyond?

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.

As we mentioned in our last alert, a careful analysis is necessary for those eligible to elect into the NYC PTET regime to determine when such an election is beneficial. The latest guidance sheds additional light into the mechanics of the NYC regime and the nuances to consider prior to opting in. To assist in deciding 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.