The Pass through Entity Tax (PTET) Now Applies to New York State – Here’s What You Need to Know.
Featuring Phil London, Partner Emeritus
Legislative changes in the New York State budget have created the highest combined local tax rate in the country for some New York City residents. At the same time, a Pass Through Entity Tax (PTET) was enacted in New York State. Below, Philip London, member of the New York State Society of CPAs, and the New York, Multistate and Local Taxation committee, provides insight on the new law.
Tell us about your involvement in the passing of the PTET.
I’ve been part of a legislative task force and the point person on the committee that has been working on a proposal for over a year to get the PTET passed in New York State. While Connecticut and New Jersey have already enacted the PTET, New York has been behind.
It’s been a long road but working with the NYSSCPA and our team in Albany, we managed to get a more expansive bill than originally proposed by Governor Cuomo.
What is the main impact of this bill?
Taxes are going up for New York’s highest earners. This new legislation raises income-tax rates on single filers with more than about $1.1 million of income and joint filers reporting more than about $2.155 million to 9.65%. For filers of any taxpayer reporting more than $5 million in income up to $25 million, the tax rate rises to 10.3%. And for taxpayers reporting more than $25 million in income, the rate rises to 10.9%.
When do the new tax rates take effect?
The new tax rates start January 1, 2021, and apply to the tax year already in progress.
How do these new tax rates compare nationally?
Top earners in New York City will be subject to the highest combined local tax rate in the country. The combined New York State and City individual income tax rate imposed on residents would be the highest in the nation, at 10.90% (State) plus 3.876% (New York City) or 14.776% all up. By contrast, California, until now the highest, tops out at 13.3% for single filers with income over $1 million.
What about the credit for taxes paid to other states?
New York State will now allow a credit to residents for pass through entity taxes of other states that are similar to the PTET.
How does the PTET work?
An eligible entity will elect to pay tax at the business level and the individual partners or shareholder will be entitled to a credit on their personal income tax returns. The credit will be equal to the PTET tax paid by the entity. Rates are 6.85% and then increasing as the entity’s income exceeds $2,155,000. The credit will be refundable. For nonresidents, it will be based on allocable income and for residents on all income (with some exceptions).
How does the new tax relate to the state and local tax (SALT)?
The IRS has said that similar taxes are deductible and not subject to the $10,000 SALT Cap. Owners of electing business can avoid the SALT Cap.
What are the key takeaways?
1. This is an effective SALT tax (State and Local Tax) workaround
2. For partners and corporation shareholders, there will be 100% credit against New York State Tax
3. A credit will be allowed for the pass through tax to be paid by other states
What are your thoughts on the bill, looking ahead?
Businesses will have until October 15, 2021 to elect in to the PTET. It is an annual election and the election will be due by March 15th in future years.
There will be many procedural aspects to the PTET in New York State that will require extensive guidance from the Department of Taxation and Finance (DTF). Watch this space for further insights as developments occur.