On May 6, the New York Senate enacted Bill S8948, giving eligible S corporations and partnerships more time to evaluate and elect the state’s pass-through entity tax for 2022. The new amendment allows entities that missed the March 15, 2022, deadline until September 15, 2022, to make their 2022 election. However, newly electing pass-through entities should be mindful of the estimated tax payment requirements.
Below is additional background on this important opportunity.
What is the New York Pass-Through Entity Tax (and Why Does it Matter)?
The New York pass-through entity tax is an optional tax for partnerships and S corporations. Eligible entities may make an annual, irrevocable election to pay state tax on certain income for tax years beginning on or after January 1, 2021.
When a partnership or S corporation elects to remit the pass-through entity tax, its owners that are subject to personal income tax may receive a tax credit they can take on their New York State personal income tax return. This election can potentially alleviate some of the federal tax burden created by the Tax Cuts and Jobs Act’s $10,000 cap on state and local tax deductions.
Which Entities are Eligible?
All non-publicly traded partnerships with a filing requirement under Tax Law Section 658(c)(1) are eligible for New York’s pass-through entity tax election. A partnership is eligible to make the election, on behalf of its qualifying owners, and will exclude the income of ineligible owners, such as corporate partners.
Eligible S Corporations
Any S corporation that has elected New York S Corporation status, as defined by Tax Law Section 208.1-A, that is subject to the fixed dollar minimum tax under Tax Law Section 209 is eligible. Consequently, a federal S corporation that does not have nexus to New York or has not made a separate New York state S election is considered ineligible.
Eligible Resident S Corporations
The New York pass-through entity tax treats partnership and S corporation owners differently when determining what income is included in each calculation:
- Partnerships may include all the distributive income of a New York resident owner in the pass-through entity tax calculation; however,
- Electing S corporations can only include New York sourced income.
This new legislation provides an opportunity for New York S corporations that certify all its shareholders are New York residents at the time of the election to include all income taxed to the resident partners from the S corporation, resulting in a larger personal income tax credit pass through to owners. An “eligible resident S corporation” — with all resident New York owners making the pass-through entity tax election — has until March 15, 2023, to file the certification for 2022.
How Do Entities Make the Extended Pass-Through Entity Tax Election?
To opt into the election, an entity must:
- Log in to (or create) the eligible entity’s Business Online Services account.
- Select the Services menu in the upper-left corner of the Account Summary homepage.
- Select Corporation tax or Partnership tax, then choose pass-through entity tax web file from the expanded menu.
- On the Form Selection page, choose pass-through entity tax annual election.
What Estimated Payments are Required?
All entities making the pass-through entity tax election after March 15, 2022, must include estimated payments at the time they make the election.
The bill requires an electing entity making an election after March 15, 2022, but before June 15, 2022, to pay 25% of the required annual payment. If an election is made by an electing entity after June 15, 2022, but before September 15, 2022, then the entity must pay 50% of the required annual payment. If the electing entity does not make its required payment, whether 25% or 50%, the New York pass-through entity tax election will be invalid.
Note: Estimated payments must be remitted using the state Web File application with an ACH debit.
New York’s pass-through entity tax can be an opportunity for owners in eligible partnerships or S corporations to minimize their personal tax. The extension to make the 2022 election will afford taxpayers additional time to evaluate potential benefits as part of their overall tax strategy.
Contact Karen Raghanti at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.