The Tax Cuts and Jobs Act (TCJA) which became effective for tax years beginning after December 31, 2017 contained sweeping tax law changes. One of these provisions limits the Federal itemized deductions for State and Local Tax (SALT) to $10,000. New York State and other states began to work on a solution to alleviate the effects of the limitation. The IRS responded in 2019 to these potential workarounds by issuing regulations to close the door on the state workarounds.
In November of 2020 the IRS issued Notice 2020-75 which will now allow pass-through entities such as partnerships and S-corporations to deduct state taxes paid at the entity level. This will allow the entities to deduct their state taxes in full without the $10,000 limitations that are currently imposed on individual taxpayers. This notice will be applicable for payments made on or after November 9, 2020 (the date IRS Notice 2020-75 was issued).
New York State Relief
In April of 2021, New York State passed the 2021-2022 Budget which provides for a new optional Pass-Through Entity Tax (PTET). Pass-through entities with tax years beginning on or after January 1, 2021 can make an election to be taxed at the entity level for NYS purposes. The election is irrevocable and must be made by March 15th of the year it is to take effect. This election is required to be made annually. For 2021, the election is due October 15th, 2021.
How it works
An electing entity will be required to pay estimated NYS taxes on March 15th, June 30th, September 15th, and December 15th. The electing entity will deduct the state taxes on its federal return, thus decreasing federal taxable income by the amount of state taxes and minimize the $10,000 limitation. On the partner/shareholder’s NYS tax return there will be a tax credit equal to the partner/shareholder’s share of NYS tax deducted by the electing entity.
The NYS tax will be calculated based on the electing entities taxable income at rates ranging from 6.85% to 10.9%. Tax rates are as follows:
- 6.85% for income not over $2 million
- $137,000 plus 9.65% of the excess over $2 million but not over $5 million
- $426,500 plus 10.3% of the excess over $5 million but not over $25 million
- $2,486,500 plus 10.9% of the excess over $25 million
For 2021 partners/shareholders of electing entities should still pay their personal quarterly estimated tax payments. New York State still needs to issue further guidance on many aspects of the law before October 15th, 2021 including the estimated tax payments for 2021 and how the election will be made.
We will be contacting affected clients in the coming weeks in order to assist you with making a decision on the election. However, if you have any questions feel free to contact us in the meantime. Each client’s situation is different and this election may not be right for all pass-through entities.