SALT Deduction Limit: Avoiding the $10,000 Federal Limitation in New York
Effective for tax years beginning on or after January 1, 2021, The New York State pass-through entity tax (PTET) is an elective tax that allows eligible partnerships (including LLCs taxable as partnerships) and New York S corporations to elect to be subject to a new tax using the personal income tax rates.
By making this election, certain owners of the qualifying pass-through entity (PTE) can potentially avoid the $10,000 federal limitation on state and local tax deductions. However, only direct partners, members, or shareholders are entitled to claim a tax credit for their share of the tax paid by the qualifying PTE. The potential benefit for non-resident owners may vary based on their state of residency.
Six Key Facts and Guidance for the New York PTET
Highlights of the New York State PTET are as follows:
- The election for the 2021 calendar year is due by October 15, 2021 and is made using a business online services account. Accountants may not make this election on behalf of their clients. For tax years beginning on or after January 1, 2022, the election must be made online between January 1 and March 15 of the calendar year of the election.
- New York State will provide an online estimated tax application for PTET by December 15, 2021. An estimate should be paid by December 31 to secure a deduction for 2021. In future years, quarterly estimated PTET payments are required by the PTE.
- Individual owners receiving a PTET credit for 2021 are still required to make their remaining 2021 individual estimated tax payments calculated as if they were not entitled to the PTET credit. Therefore, it is likely that the PTET credit will generate a 2021 New York State tax overpayment to be refunded or credited to the following year. New York State is addressing the tax consequence of this overpayment which could potentially reduce or eliminate the intended federal tax benefit for the 2021 tax year.
- Eligible taxpayers that receive a PTET credit from an electing entity may claim the credit on Form IT-653, Pass-Through Entity Tax Credit, and attach it to their New York State personal income tax return.
- A trust, other than a trust that is disregarded for tax purposes, that is a direct partner, member, or shareholder in an electing entity is allowed a PTET credit on the trust’s personal income tax return, but it is not permitted to distribute any PTET credit it receives to its beneficiaries.
- A partner, member or shareholder that is not subject to tax under Article 22, including but not limited to a corporate partner, is not eligible for the PTET credit. Additionally, a partner that is itself a partnership is not eligible for the PTET credit.
Additional guidance from New York State is located at: https://www.tax.ny.gov/bus/ptet/
Connect with a Freed Maxick Tax Specialist
Eligible pass-through entities contemplating this election for the 2021 calendar year should begin planning to determine whether the election may provide an overall tax benefit or tax cost as it relates to the federal SALT deduction limit.
Should you have any questions, concerns or comments about the New York PTET election, or wish to review your situation, please contact me in our tax services department at Don.Warrant@freedmaxick.com or via phone at 716.332.2647.