This Memorandum discusses the New York City pass-through entity tax (“PTET”) election. Partnerships and S corporations with New York City resident partners, members or shareholders may elect into this tax. Once elected, New York City resident owners may derive a federal income tax benefit. Similar to the New York State PTET and other states’ elective taxes on pass-through entities, a New York City resident individual will generally be able to deduct his or her respective distributive share of New York City PTET as a general business deduction that is not subject to the $10,000 limitation on state and local taxes.
Summary of the New York City PTET
The New York City PTET paid by partnerships or S corporations can be claimed as a credit against the New York City personal income tax liability of partners, members or shareholders. The New York City PTET is imposed on “New York City pass-through entity taxable income” (“PTE taxable income”) at a rate of 3.876%.
PTE taxable income generally consists of items of taxable income and gain (as reduced by items of deduction and loss) that are allocated to direct partners or shareholders that are New York City resident individuals. For these purposes, owners of New York City partnership or S corporations cannot be part-year residents of New York City; a partner, member or shareholder that is a New York City resident for more than half the year is treated as a NYC resident for PTET purposes.
It is unclear how the New York City PTET applies to trusts that are owners of eligible pass-through entities.
The New York City PTET election is made annually. New York City partnerships and S corporations that have elected into the New York State PTET may elect into the New York City PTET with effect from January 1, 2022. The election for 2022 must be made by March 15, 2023. For future taxable years, the election is made between January 1st and March 15th of the election year and cannot be revoked after the pass-through entity has made an estimated PTET payment. Therefore, the election for both 2022 and 2023 must be made by March 15th, 2023.
Electing entities are not required to make estimated New York City PTET for 2022, but it may make an optional estimated tax payment prior to December 31, 2022. This optional estimated tax payment must be made in 2022 for a cash basis taxpayer to receive the federal tax benefit of the PTET payment for 2022. Individuals must still pay estimated tax for New York City personal income tax purposes for 2022 regardless of an entity’s NYC PTET election or optional estimated PTET payments. Beginning for 2023, electing entities must make quarterly estimated PTET payments.
Application to Tiered Entities
Currently, only pass-through entities that have at least one direct individual New York City resident owner may make the PTET election. Therefore, lower-tier partnerships that do not have direct individual owners cannot make this election. Upper-tier partnerships or S corporations may make the election with respect to its distributive share of New York City PTE taxable income that is allocated to it from lower-tier entities.
Overlap with Existing Entity Level Taxes
The New York City PTET is optional and in addition to existing entity-level taxes paid by the entity. Currently, partnerships are subject to the New York City unincorporated business tax and S corporations are subject to the New York City General Corporation Tax. The New York City PTET represents the New York City individual owner’s personal income tax he or she would owe in respect of his or her distributive share of income from the entity. Therefore, the additional tax payment at the entity level could impact the cash flow of the company and may also reduce the tax distributions the company makes to its owners.
Takeaways
New York City pass-through entities that have already made the New York State PTET election should consider making the New York City PTET election. This election may impact of the cash flow of an entity but has the potential to provide significant tax benefits to direct individual City resident owners of the entity.
For additional information on the New York City PTET, please contact a member of Seward & Kissel’s Tax or Investment Management Practices. For prior Alerts about pass-through entity taxes, see “New York State Enacts Pass-Through Entity Tax” and “New York State Releases Pass-Through Entity Tax Guidance.”
