![]() Pass-Through Entity Tax. For pass-through entities that are treated as partnerships for tax purposes, the tax is imposed on “pass-through entity taxable income,” which consists of two parts: (i) in the case of the entity’s nonresident individual partners, the entity’s income, gain, loss, or deduction from New York sources (“New York source income”) to the extent included in the nonresident partners’ own New York State taxable income, and (ii) in the case of the entity’s resident individual partners, the entity’s income, gain, loss, or deduction to the extent included in the resident partners’ own New York State taxable income, regardless of whether derived from New York sources. The law authorizes the Commissioner to extend the deadline for making the election for up to six months. Since under the new law the first estimated payment was due March 15, 2021, we expect in the coming weeks that the election deadline for 2021 will be administratively extended. The pass-through entity election is made annually, by the due date of the first estimated tax payment, and is irrevocable for the year. New York S corporations ( i.e., federal S corporations that make a New York S corporation election) are also eligible. As a result, not only may a New York business operating in partnership form be eligible, but a partnership having no New York source income can also qualify as long as it has a New York resident partner who includes his or her share of income in the partner’s own New York State taxable income. An “eligible partnership” is a partnership (or an LLC taxable as a partnership) with a New York tax return filing obligation as a result of having (i) income from New York sources or (ii) one or more New York resident partners. The tax is elective for tax years beginning on or after January 1, 2021.Įligibility. It does not, however, extend to the New York City resident income tax. ![]() Since its purpose is to provide a SALT limitation workaround to New York State taxpayer individuals, the tax is imposed at rates equivalent to the current (and recently increased) New York State personal income tax rates-that is, at 6.85 percent of pass-through entity taxable income of up to two million dollars, with excess income taxed at rates of between 9.65 percent and 10.90 percent. Qualifying pass-through entities will afford their owners a legal means to fully deduct their New York State income taxes and avoid the SALT limitation. The Pass-Through Entity Tax is an elective tax available to eligible partnerships (including limited liability companies taxable as partnerships) and New York S corporations. What the New York State Pass-Through Entity Tax Does In November 2020, the Internal Revenue Service issued Notice 2020-75, explicitly sanctioning the availability of state entity-level taxes on partnerships and S corporations, whether mandatory or elective, as a workaround to the SALT limitation. Those state taxes-both elective and mandatory-generally shifted state and local income tax deductions from individual owners to their pass-through business entities, where the deductions are not subject to the SALT limitation at the entity level. Several states (such as Maryland, New Jersey, and Connecticut) have previously enacted entity-level income taxes on pass-through entities as workarounds to the SALT limitation. ![]() For many individuals, particularly those in high-tax states such as New York, this limitation has often resulted in a significant increase in their federal income tax liabilities. The tax takes on added significance in mitigating the effect of the newly-imposed New York State personal income tax rate increases on high earners.įor tax years beginning after 2017, for federal income tax purposes an individual taxpayer (including married joint filers) is limited to an annual aggregate $10,000 itemized state and local tax deduction (“SALT limitation”). This consequential tax legislation, available to electing pass-through entities, provides a mechanism for New York State individual taxpayers to limit the impact of the federal $10,000 limitation on state and local tax deductions under the Tax Cuts and Jobs Act of 2017. On April 19, 2021, New York Governor Andrew Cuomo signed into law legislation that creates a New York Pass-Through Entity Tax, effective for tax years beginning on or after January 1, 2021.
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