New York’s recent legislation for PTET election and other tax provisions

Recently, New York Gov. Kathy Hochul signed the state’s 2022-23 budget package, S.B. 8009. The budget sets forth a myriad of legislative changes to the state’s personal income, corporate franchise, sales and use, motor fuel, property and miscellaneous tax provisions. This alert will address some of the more significant provisions enacted that are applicable to our clients.

In addition, this summary will discuss New York state legislation signed late last week by Gov. Hochul that defers the state’s pass-through entity tax (PTET) election due date for the 2022 tax year to Sept. 15, 2022. This legislation also contains modified estimated tax payment requirements with respect to pass-through entities (PTEs) that make their 2022 PTET election post March 15, 2022, and S corporations that elect to be resident S corporations for the New York state 2022 PTET tax year.

The following is a summary of the significant provisions enacted by the budget.

Enhanced PTE tax for certain S corporations 

The budget includes provisions that may enhance the benefit of making a New York state PTET election for certain S corporations. 

Prior to the enactment of the budget, those S corporations that made a New York PTET election calculated their New York state PTET based on the S corporation’s apportioned income to New York state. Such S corporation’s New York PTET was determined based on New York-sourced income only. This potentially resulted in a lower New York state PTET and PTET credit to such S corporation owners.

Therefore, the New York state PTET election to New York resident owners of S corporations with low New York state business apportionment percentages received a diminished benefit from the New York PTET election.

It should be noted that this was a significant distinction from how qualifying electing partnerships and limited liability companies calculated their New York state PTET. For qualifying electing partnerships and LLCs, the New York PTET is determined differently for the resident pool of owners and the nonresident pool of owners.

The budget modifies the definition of an “electing S corporation.” The definition is amended to say that an electing S corporation will either elect and qualify to be subject to the PTET as a resident S corporation or an electing S corporation will elect to be subject to the PTET as a standard S corporation. The budget sets forth the following definitions for the two potential electing S corporation:

Electing resident S corporation. An electing resident S corporation is an electing S corporation that certifies at the time of its election that all its shareholders are residents of New York for purposes of Article 22 of this chapter.

Electing standard S corporation. An electing standard S corporation is an electing S corporation that is not an electing resident S corporation.

For an electing S corporation to qualify as an electing resident S corporation, the electing resident S corporation must certify “at the time of its election that all of its shareholders are residents of New York for purposes of Article 22 of this chapter.” To date, the state has not provided guidance as to how to effect this certification.  

For an electing entity that is an electing resident S corporation, the electing resident S corporation’s PTET taxable income includes the sum of all items of income, gain, loss or deduction to the extent included in the taxable income of the resident shareholders. If an electing entity is an electing standard S corporation, then its PTET taxable income includes the sum of all items of income, gain, loss or deduction derived from or connected with New York sources, i.e., apportioned to New York state.

Extended PTET election due date for 2022 PTET tax year

The budget indicates the aforementioned amendments are applicable for tax years beginning on or after Jan. 1, 2022. The budget was signed into law in mid-April, i.e., after the PTET election due date of March 15, 2022, for the New York state PTET for 2022. S corporations with low New York business apportionment that would qualify as electing resident S corporations may have foregone making a New York PTET election for 2022.

In response to the missed opportunity, both the New York state Senate and Assembly passed the NYS Assembly and Senate bill (A10080/S8948) that for 2022 extends the date for pass-through entities to elect into the PTET to Sept. 15, 2022.  

Late last week, Gov. Hochul signed the legislation, which amends section 861 of Article 24-A, the state’s PTET provisions by adding the following two significant modifications:

1. The election to be taxed pursuant to Article 24-A of the tax law for taxable year 2022 must be made by Sept. 15, 2022, and
2. The certification to be taxed as an electing resident S corporation for the taxable year 2022 must be made by March 15, 2023, in a manner prescribed by the commissioner.

The legislation specifically addresses the estimated payment due dates and required payments for those PTEs that did not previously make their New York state 2022 PTET election by March 15, 2022, but now choose to make their 2022 PTET election by Sept. 15, 2022. The legislation’s estimated due dates and required payments are dependent upon when the eligible PTE makes its 2022 PTET election within the extended due date period ending Sept. 15, 2022.

In addition, the legislation addresses the estimated payment due dates and required payments for those S corporations that for the 2022 PTET tax will be an electing resident S corporation.

New York City PTET for 2023

The budget includes a new tax article that provides for a New York City pass-through entity tax. Tax Law Article 24-B creates a NYC PTET that is comparable but is not the same as the New York state PTET. The NYC PTET is effective for tax years beginning on or after Jan. 1, 2023. The annual NYC PTET election may be made by an “eligible city partnership” or an “eligible city resident S corporation.” The NYC PTET is irrevocable.

An “eligible city partnership” is any partnership as provided for in IRC section 7701(a)(2) that has a NYS partnership return filing obligation under Tax Law section 658(c)(1) for which there is at least one partner or member that is a city resident individual. An “eligible city resident S corporation” is any New York S corporation that is subject to tax under Tax Law section 209 that has only city resident individual shareholders.

An eligible city partnership that makes the NYS PTET election is permitted to make the NYC PTET election for the same taxable year. An eligible city resident S corporation that makes the NYS PTET as an “electing resident S corporation” is permitted to make the NYC PTET election for the same taxable year.

The NYC PTET election must be made by the due date for the NYS PTET election. The NYC PTET is imposed at a flat rate of 3.876% that reflects the highest NYC personal income tax rate.

An initial review of the NYC PTET indicates that the NYC PTET taxable income is calculated based on all items of income, gain, loss or deduction to the extent such items of income are included in the city taxable income of a partner, or member. Our initial review of the NYC PTET taxable income calculation of an “eligible city resident S corporation” looks like it will be based on all items of income from the electing eligible city resident S corporation included in its resident shareholder’s income.

A credit is available to resident partners, members or shareholders against their personal income tax equal to their direct share of the NYC PTET.

It should be noted that the NYC PTET is in addition to the New York City Unincorporated Business Tax imposed on partnerships and the NYC general corporation tax imposed on S corporations.

PTET income tax addback modification for personal income tax purposes

Prior to the enactment of the budget, there was a concern that section 612 of Tax Law Article 22, Personal Income Taxes, contained two subsections, sections (b)(3) and (b)(43), that required duplicate addbacks of the state’s PTET and other states’ PTETs in determining an individual’s New York state taxable income. The budget amends section 612(b)(3). The amendment adds a subsection 612(b)(3)(C) to address the PTET deduction so as to set forth that the term “income taxes” in the case of a partner, member or shareholder of an electing partnership or electing S corporation does not include the PTET to the extent it is added back under section 612(b)(43), the PTET deduction addback.

COVID-19 capital costs tax credit program

The budget creates a refundable tax relief program targeting COVID-19-related expenses for small businesses. Eligible COVID-19-related capital investments include:

• costs associated with expanding space to accommodate social distancing
• HVAC equipment
• expenses related to outdoor space expansions
• machinery and equipment to facilitate contactless sales

As set forth in the budget’s enacting legislation, in order to be eligible for a tax credit under the COVID-19 capital costs tax credit program, a business entity must:

1. be a small business as defined in section 131 of this chapter and have $2.5 million or less of gross receipts in the taxable year that includes Dec. 31, 2021;
2. operate a business location in New York state; and
3. have at least $2,000 in qualifying COVID-19 capital costs.

The credit is 50% of the applicant’s qualifying costs, up to $25,000. The credit is available for qualifying capital costs incurred from Jan. 1, 2021, through Dec. 31, 2022.

Gas tax holiday

The following state taxes on motor fuel and highway diesel motor fuel are suspended from June 1 to Dec. 31, 2022:

• state fuel excise taxes (Article 12-A);
• state sales and use taxes (including the Metropolitan Commuter Transportation District sales and use tax); and
• prepaid sales taxes.

Every retailer is directed to pass the entirety of this tax savings on to consumers. Also, any retailer that purchases motor fuel or diesel motor fuel during this period upon which such taxes were previously paid and included in the price paid by such retailer are entitled to a refund or credit of such taxes. Further, localities would have the option to cap the price their applicable local sales and use tax rate is imposed on at $4 per gallon.

For more information or to find how our tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.