New York Expands Federal Income Tax Benefits for Certain Pass-Through Entity Owners

April 28, 2022

By: Jeff Glickman, SALT Partner

At a glance

  • The main takeaway: New York State enacted legislation amending the state’s pass-through entity tax and establishing a pass-through entity tax for New York City to expand federal income tax benefits available to its residents.
  • Assess the impact: Pass-through entity tax legislation consistently evolves from state-to-state, making it imperative to fully understand the effects, positive and negative, with a trusted advisor prior to making any elections.
  • Take the next step: Aprio’s State and Local Tax (SALT) Team can help you navigate the impact of a pass-through entity tax election and potential federal income tax savings.

Schedule a free consultation today to learn more!

The full story:

On April 9, 2022 the Governor of New York, Kathy Hochul, signed tax legislation (Bill No. S08009C;A09009-C) in connection with the state’s FY2023 budget.[1] This legislation expands federal income tax benefits to certain pass-through entity (PTE) owners by allowing S-corporations that are 100% owned by New York State residents to pay PTE tax on all income and by enacting a New York City PTE tax. These items are discussed in more detail below.

Expanded Benefits for Certain S-Corporation Shareholders

Under the original version of the state’s PTE tax, an S-corporation calculated its PTE tax liability based on its New York source income, regardless of the residency of its shareholders. On the other hand, partnerships calculated PTE tax based on the sum of all income allocated to resident partners plus New York source income allocated to nonresident partners. Therefore, resident owners of partnerships paid more PTE tax and therefore received a greater federal income tax benefit than resident shareholders of S-corporations.[2]

Pursuant to the new legislation, S-corporations are now divided into two classifications for PTE tax purposes — an “electing resident S-corporation” and an “electing standard S-corporation.” An electing resident S-corporation is an S-corporation that makes a timely PTE tax election and that certifies at the time of such election that all its shareholders are residents. Otherwise, the S-corporation is classified as an electing standard S-corporation.

The benefit of being an electing resident S-corporation is that its PTE tax liability is calculated based on all income, instead of solely New York source income. This results in a greater PTE tax liability, thereby providing a larger federal income tax deduction. Unfortunately, resident shareholders of an S-corporation that also has nonresident shareholders, and is therefore an electing standard S-corporation, will not receive this additional benefit.

This amendment is effective for taxable years beginning on or after January 1, 2022. However, for the 2022 taxable year, since the PTE election was already due on March 15, 2022, the certification to be an electing resident S-corporation must be made by March 15, 2023. In addition, an electing resident S-corporation will be allowed to make estimated payments on March 15, 2022 (which was already due) and June 15, 2022 equal to 25% of the required annual payment as if it was an electing standard S-corporation. For its estimated payment due on September 15, 2022, the electing resident S-corporation must have paid in at least 75% of its required annual payment taking into account its electing resident S-corporation status.

New York City PTE Tax

For tax years beginning on or after January 1, 2023, a PTE may be eligible to make an election to pay New York City (NYC) income tax at the entity level. The tax works in essentially the same way as the state’s PTE tax, with some differences as described below:

  • A partnership, other than a publicly traded partnership, is eligible to make the NYC PTE tax election if it makes the state PTE tax election and has at least one partner that is a NYC resident individual.
  • An S-corporation is eligible to make the NYC PTE tax election if it makes the state PTE tax election and all its shareholders are NYC resident individuals.

In other words, since NYC does not tax nonresident individuals, if an S-corporation has a nonresident individual shareholder, it is ineligible to make the NYC PTE tax election.

The NYC PTE tax is imposed at the rate of 3.876% on all items of income, gain, loss, or deduction to the extent included in income of a resident partner or shareholder who is a NYC resident individual taxpayer. There is no apportionment to arrive at NYC source income since the only income that is subject to NYC PTE tax is the amount that passes through only to NYC residents.

Finally, the NYC PTE tax is in addition to the NYC Unincorporated Business Tax on partnerships and NYC General Corporation Tax on S-corporations.

The bottom line

The PTE tax landscape continues to change regularly, as new jurisdictions enact these taxes and others amend existing ones or provide additional guidance. PTEs and their advisors must analyze the impact of making these elections to determine the potential tax benefits as well as any unfavorable effects on certain owners. Aprio’s SALT team has experience assisting taxpayers with modeling the impact of these elections that can provide significant federal income tax savings. 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.

This article was featured in the April 2022 SALT Newsletter.

For more information contact Jeff Glickman at [email protected] or call 770-353-4791.


[1] See Part MM.

[2] Presumably, this distinction was made between partnerships and S-corporations to avoid issues with the federal S-corporation “one class of stock” requirement.

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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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.

(770) 353-4791