Frequently asked questions about the pass-through entity tax (PTET)
If a partnership elects to participate in PTET, can it choose which partners participate in the PTET tax and credit?
An eligible entity that opts in to PTET must include all partners, members, or shareholders (resident and nonresident) that are subject to tax under Article 22 when computing its PTE taxable income. In addition, the PTET credit must be allocated to all eligible credit claimants according to the guidance in TSB-M-21(1)C, (1)I, Pass-Through Entity Tax.
Can a single-member Limited Liability Company (SMLLC) make the PTET election?
The PTET election is available to a SMLLC that elects to be treated as an S corporation for New York purposes. A SMLLC treated as a disregarded entity is not eligible to make the PTET election.
What actions can tax professionals with a Power of Attorney (POA) or an EZ Rep Tax Professional account take on behalf of their clients?
Duly authorized tax professionals may electronically file most PTET-related forms and returns on behalf of a client, including filing estimated payments, extensions, and the annual PTET return. However, the annual election may not be made by a representative as they are not an authorized person.
Can a partnership or S corporation formed after the annual election deadline opt in to PTET for the calendar year?
All entities, including newly formed partnerships or New York S corporations, are not eligible to opt in to PTET after the annual election deadline has passed.
If an electing entity has more than one tax year within a calendar year, may that entity make the PTET election for each short tax year?
An entity with more than one short tax year within a calendar year is only permitted to make one election for the PTET calendar year. The election may only be made for the first short tax year which ends during the calendar year.
Example: A partnership has two short tax years of January 1, 2022 through March 31, 2022, and April 1, 2022 through December 31, 2022. The partnership may only make the PTET election for the first short tax year beginning January 1, 2022 and ending March 31, 2022 by March 15, 2022.
If an electing entity has a 52/53-week accounting period and its year-end is January 2, 2023, what is the entity’s PTET tax year?
A 52/53 week filer’s tax year is deemed to end on the last day of the calendar month nearest to the last day of the 52-53 week accounting period. Therefore, this 52/53 week filer’s tax year end is December 31, 2022; the entity may elect into PTET for 2022.
Can a PTET election be canceled?
Once an entity has made the annual PTET election, it may not be revoked. The electing entity must continue to make quarterly estimated PTET payments and file an annual PTET return for the elected tax year.
Which taxes are offset by a PTET credit?
A PTET credit offsets all taxes computed and reported on New York State personal income tax Forms IT-201, IT-203, and IT-205. If the PTET credit exceeds the tax due for the tax year, the excess credit will be refunded without interest.
A partnership currently files group returns (Form IT-203-GR, Group Return for Nonresident Partners) on behalf of several nonresident partners. If the partnership opts in to PTET, can the partners claim the PTET credit on the group return?
Partners reporting income on Form IT-203-GR may not claim any New York State income tax credits, including the PTET credit. The nonresident partners must file individual New York State personal income tax returns (Form IT-203, Nonresident and Part-Year Resident Income Tax Return) to claim the PTET credit.
When a taxpayer claims both a PTET credit and a resident tax credit on their income tax return, in which order should the taxpayer apply the credits?
Nonrefundable credits for individuals are generally applied before refundable credits. The resident tax credit is non-refundable and must be applied before the PTET credit, which is fully refundable.
Who is eligible to claim a disregarded entity’s PTET credit?
An individual, estate, or trust that is subject to tax under Article 22 and required to report a disregarded entity’s tax information on its tax return is treated as a direct partner, member, or shareholder of the PTET entity that gave the disregarded entity a PTET credit; the individual, estate, or trust is eligible to claim the disregarded entity’s PTET credit.
Are trusts eligible for the PTET credit?
Other than a trust that is disregarded for tax purposes, a trust that is a direct partner, member, or shareholder in an electing entity is allowed a PTET credit on its personal income tax return (Form IT-205, Fiduciary Income Tax Return). The trust cannot distribute any PTET credit it receives to its beneficiaries.
Are grantor trusts that are partners, members or shareholders in an electing entity, and who file Form IT-205 where the income and tax liability flows through to the grantor, eligible to claim the PTET credit?
Grantor trusts are considered disregarded entities and therefore not eligible to claim a PTET credit. Instead, the individual grantor is considered the direct partner or member of the electing entity and is eligible to claim the PTET tax credit on their personal income tax return.
A partnership plans to opt in to PTET and pay the tax at the entity level. The partnership has two partners: Individual A and New York S corporation B. Can New York S corporation B claim a PTET credit?
An S corporation is not eligible to claim a PTET credit at the corporate level because it is not subject to tax under Article 22. Only a direct partner, member, or shareholder subject to tax under Article 22 that is issued a federal Schedule K-1 by the electing entity based on the partner’s, member’s, or shareholder’s direct ownership in the electing entity may claim a PTET credit. When computing a pass-through entity’s taxable income, an electing entity must exclude all income that flows to corporate partners, including S corporations. If the partnership opts in to PTET, only the income that flows to Individual A is included in the partnership’s PTE taxable income. Additionally, only Individual A receives a PTET credit from the partnership.
Partnership X plans to opt in to PTET and pay the tax at the entity level. Partnership X has two partners: Individual A and New York S corporation B. New York S corporation B has individual shareholders. Should New York S corporation B or Partnership X opt in to PTET?
For the individual shareholders to be eligible for the credit, New York S corporation B must opt in to PTET. The S corporation calculates its PTE taxable income based on items of income, gain, loss, or deduction that flow through to the shareholders for New York State personal income tax purposes, including any amounts the S corporation received as a corporate partner. Partnership X must also opt in to PTET to distribute a credit to Individual A.
A partnership makes special allocations to some partners. How does the partnership compute PTE taxable income and the PTET credit pools?
If the partnership made special allocations, it must make appropriate adjustments to take into account those allocations in order to fairly represent the partners’ incomes. PTE taxable income and the PTET credit pools must reflect the relative contributions of each partner to the overall PTE taxable income and PTET paid. Note: Special allocations include guaranteed payments. See question below for more information.
If the partnership did not make any special allocations of income or loss, compute PTE taxable income and PTET credits per TSB-M-21(1)C, (1)I, Pass-Through Entity Tax, which assumes no special allocations were made.
PTET must be allocated among nonresident and resident pool members by the eligible taxpayer’s profit and loss ownership percentage within the pool. If a non-equity partner receives guaranteed payments from a partnership but does not have any profit or loss percentage, are the guaranteed payment included in PTE taxable income, and can the non-equity partner receive a PTET credit?
Guaranteed payments which are taxable by New York at the individual partner level must be included in PTE taxable income to the same extent. The partner will be allocated PTET credit related to these guaranteed payments.
Computing PTE taxable income and PTET credits as defined in TSB-M-21(1)C, (1)I, Pass-Through Entity Tax, assumes the partners have no special allocations of income or loss. For purposes of computing PTE taxable income and the PTET credit, special allocations include guaranteed payments because these types of payments function similarly to special allocations. If special allocations are made, the partnership must make appropriate adjustments to reflect these allocations to fairly represent the partners’ incomes.
Can guaranteed payments paid to nonresident foreign partners for services performed outside the United States be included in the PTET?
Guaranteed payments to partners are included in PTE taxable income to the same extent they are taxable by New York at the individual partner level.
Can retirement payments to nonresident partners that are protected from nonresident state taxation by Section 114 of Title 4 of the United States Code be included in the PTET base?
Retirement payments that are not taxable by New York at the individual partner level are not included in PTE taxable income.
If one of the pools (resident or nonresident) is negative, will the overall PTE taxable income only be that of the positive pool (and not be reduced by the negative pool’s PTE taxable income)?
Total PTE taxable income of a partnership consists of the income of both nonresident and resident pools. A net loss within one pool will offset income in the other pool for purposes of calculating total PTE taxable income. Limitations related to negative pools as described in TSB-M-21(1)C, (1)I, Pass-through Entity Tax, are only applicable to the distribution to eligible partners of the total PTET paid. Partners in the negative pool will not receive any PTET credit.
If Partnership A is owned by individual partners B and C, Partnership D, and S corporation E, how is PTE taxable income computed?
PTE taxable income is computed including only amounts that flow through to individual partners B and C that are taxable under Article 22. Income flowing to a Partnership D and S corporation E is not included in PTE taxable income.
If an electing upper-tier partnership receives income from a lower-tier partnership that elected in to PTET, can the upper-tier partnership include the lower-tier partnership’s income in PTE taxable income?
The upper-tier partnership would include in PTE taxable income any amounts flowing to partners that are subject to tax under Article 22, including any income received from a lower-tier partnership.
When a taxpayer claims a PTET credit on their personal income tax return, what amounts must the taxpayer add back?
The amount of the PTET credit claimed by the partners, members, or shareholders on their New York income tax returns must be added back only once, at the individual level, using addition modification A-219, Pass-through entity tax (PTET) deduction addback (IT-653, Pass-Through Entity Tax Credit) on Form IT-225, New York State Modifications. For more information on this addition modification, see the instructions for Form IT-225.