New York and Georgia Legislatures Enact Pass-Through Entity Taxes

House Chamber of Georgia State Capitol

By: Jeff Glickman, SALT Partner at Aprio

At a glance:

  • The Main Takeaway: The New York and Georgia state legislatures have enacted pass-through entity taxes, bringing major changes for certain types of corporations.
  • Impact on Your Business: Businesses and their owners should contact their tax advisors to understand how these elections may impact their federal and multistate income tax liability.
  • Next Steps: Contact Aprio’s expert State and Local Tax (SALT) team for state-specific advice on how to handle these new changes.

The full story:

Recently, both the New York and Georgia state legislatures enacted pass-through entity (PTE) taxes as a workaround to the federal $10,000 cap on the state and local tax itemized deduction.[1] As you will see from the summaries below, there are some significant differences in the way each state’s PTE tax works.

New York

On April 19, 2021, Governor Cuomo signed the state’s fiscal year 2022 budget bill, S.2509/A.3009 (Part C), which included many changes to the state’s tax laws. Among them were temporary tax rate increases for individuals and corporations as follows:

  • Individuals: For tax years 2021–2027, the state removed the 8.82% tax bracket and added three new tax rate brackets — 9.65%, 10.30% and 10.90% — for married couples filing jointly with taxable income over $2,155,350, $5,000,000 and $25,000,000, respectively (lower income levels are established for taxpayers filing separately or as heads of households).
  • Corporations: For tax years 2021–2023, the state added a new 7.25% tax bracket to the franchise tax for corporations with a business income base of more than $5,000,000. Below that, the regular 6.5% rate still applies.

In addition, the legislation established a PTE tax for electing S-corporations and partnerships (including LLCs treated as S-corporations or partnerships for federal income tax purposes). Some of the notable features of the tax are as follows:

  • The PTE tax is applicable for tax years beginning on or after January 1, 2021.
  • It is an elective tax, and an irrevocable election must be made each year by the due date of the first estimated tax installment of the taxable year, which is March 15. For 2021, since March 15 has already passed, the law allows taxpayers to make the election by October 15, 2021.
  • For an electing partnership, PTE taxable income is the sum of (i) all items of income, gain, loss or deduction derived from or connected to New York sources to the extent such items are included in the taxable income of a nonresident partner subject to New York personal income tax; and (ii) all items of income, gain, loss or deduction to the extent such items are included in the taxable income of a resident partner subject to New York personal income tax.
  • For an electing S-corporation, PTE taxable income is the sum of all items of income, gain, loss or deduction derived from or connected to New York sources to the extent they are included in the taxable income of a shareholder subject to New York personal income tax.
  • There are four tax brackets: (i) 6.85% for income below $2 million; (ii) 9.65% for income between $2 million and $5 million; (iii) 10.30% for income between $5 million and $25 million; and (iv) 10.90% for income over $25 million.
  • Direct partners/shareholders are entitled to a refundable tax credit for their share of the PTE tax paid by the entity. For this purpose, a direct partner/shareholder includes any ownership through a disregarded entity.
  • Estimated tax payments are due in equal installments on March 15, June 15, September 15 and December 15 of the taxable year, based on the lesser of (i) 90% of the PTE tax due for the current year or (ii) 100% of the PTE tax due for the preceding calendar year. For 2021, estimated payments are not required.

Georgia

On March 22, 2021, the Georgia legislature passed House Bill 149.[2] The bill establishes a PTE tax for electing S-corporations and partnerships (including LLCs treated as S-corporations or partnerships for federal income tax purposes). Some of the notable features of the tax are as follows:

  • The PTE tax is applicable for tax years beginning on or after January 1, 2022.
  • It is an elective tax, and an irrevocable election must be made each year by the due date of the PTE’s annual tax return, including any extensions. Therefore, the election may be made as late as September 15 of the following taxable year. Note: This is up to a year and a half later than the due date of the election for New York.
  • For a PTE to be eligible to make an election, it must be 100% directly owned and controlled by persons eligible to be S-corporation shareholders under IRC Section 1361; that includes only U.S. individual shareholders (and certain other eligible shareholders). If there is one ineligible owner, like a corporation or non-U.S. individual, the entity is not permitted to make the election. Note: This is unlike New York’s rule, which will still allow the election, but will only apply the tax to income flowing to individual owners.
  • The PTE tax is paid at a rate of 5.75% on net income computed under the applicable Georgia rules for partnerships and S-corporations and as allocated and apportioned to the state. For purposes of computing income, the PTE is not allowed to deduct “taxes that are based on or measured by gross or net income or any other variant thereof.”
  • Unlike New York, which provides PTE owners with a credit against their personal income tax liability for their share of the PTE tax paid, Georgia’s bill provides that PTE owners shall not recognize their respective share of the income on which the PTE paid the PTE tax. This means that if an owner’s sole income is from an entity that paid the PTE tax, then the owner won’t report any income to Georgia. Therefore, the owner may not be able to use any personal income tax credits, such as the Student Scholarship Organization tax credit, or any jobs or research & development (R&D) tax credits that the owner has carried forward from prior years. Note that an owner’s basis in the PTE is not impacted by the election except that the owner’s pro-rata share of the PTE tax paid by the entity is taken into account.
  • The PTE is required to make estimated tax payments in the same manner as required for corporations.

New York and Georgia join a growing list of states that have enacted PTE taxes, and other states that are considering similar taxes in their legislatures. Businesses and their owners should contact their tax advisors to understand how these elections may impact their federal and multistate income tax liability.

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the April 2021 SALT Newsletter.

[1] For our article on IRS Notice 2020-75 recognizing the deduction for PTE taxes paid, see the Nov./Dec. 2020 SALT Newsletter. That article also contains links to prior articles that we have done on PTE taxes.

[2] As of the date of this publication, the legislation has not yet been signed by Governor Kemp.

Disclosure

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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