Important updates for New York flow-through tax
We’ve tried to answer all customer and practitioner questions regarding the New York Transit Entity Tax (TFWP), with the deadline for the 2021 annual election looming on October 15th. We have published a handy list of FAQs in State tax notes, covering the nuts and bolts of the TFWP, state credits and the federal deduction. We continued with our blog post here after NYS issued PTET guidelines in late August. But, of course, new questions continue to arise.
Based on discussions internally, with other SALT practitioners, and with representatives from the NYS who were actively involved in the PTET legislation and guidance, we wanted to add a few more FAQs to our list.
My company is a mandatory S company according to tax law §660 (i). I went online to do the PTET election and it says I did not do the S election. What gives?
You must make election S for 2021 by filing Form CT-6 in order to make the PTET election. This is because the requirement to be treated as a NY S corporation under §660 (i) tax law due to the percentage of investment income received by the corporation is determined at the end of the year. , while the choice of the TFWP takes place before the end of the year. . Thus, the fact that choice S is mandatory or not for 2021 is unknown on October 15, 2021 so the form must be filed. Fax Form CT-6 this week (518-435-8605), then call to follow up, to make sure it gets processed in time to make the TFWP election!
I am a resident of NY for part of the year, but for the purposes of the TFWP, I am treated as a resident for a full year, so my entire distributive share is included in the taxable income of the TFWP. When I file my resident income tax return for part of the year, will I fully benefit from the credit?
Yes! TSB-M-21 (1) C, (1) I states that if an individual is a resident of NY for more than half of the year, he or she will be treated as a full year resident for the purposes of PTET. If they reside less than half the year, they will be treated as non-residents for the purposes of the TFWP. The difference is whether that partner’s share of non-New York source income and unsupported income (such as interest, dividends, and capital gains) is included in the TFWP tax base. Suppose an individual leaves NY on October 1st. The entire distributable portion is included in the PTET base. But when they file their NY resident return for part of the year, all income attributable to their period of residence will be included in taxable income, but only NY source income from the non-resident period will be included. included. Nonetheless, they will fully benefit from the PTET taxes paid on their behalf – calculated as if they were year round residents – as a credit against their New York tax, which will likely result in a larger refund.
My partnership makes guaranteed payments to partners that are not based on the partner’s ownership percentage. How to calculate the amount of credit?
The credit calculation methodology in the aforementioned TSB-M only applies if a partnership does not use a special allowance. If the partnership makes guaranteed payments to the partners and these payments do not match the partner’s capital interest or its share of the profit and loss, the credit calculation should be based on the partner’s share in the TFWP. In other words, if a partner owns 10% of the partnership, the partnership has $ 10,000 in net profits which are all from NY source, and also only pays that partner $ 10,000 in guaranteed payment, it should receive 55 % of total PTET tax as a credit. [($1,000 + $10,000) / ($10,000 + $10,000)].
If the partnership has income partners who do not have capital accounts and do not receive any of the net profits of the partnership, would these persons be treated as partners or employees for the purposes of including their guaranteed payments in the tax base of the PTE?
New York has not provided any guidance on this issue with respect to the TFWP. But the Tax Appeals Tribunal has previously ruled that a nominal “partner” was a partner for New York income tax purposes when the partner: (1) did not receive a share of the income or loss of partnership; (2) did not have a capital account; and (3) received only one guaranteed payment that was reported to it on a Schedule K-1. Tosti case, (TAT 05/12/2011). We do not think New York would take a different approach for the purposes of the TFWP. Thus, “income partners” resembling the Tosti profile should be treated as partners, the guaranteed payments they receive should be included in the calculation of the partnership’s TFWP and income partners should be entitled to a credit for their part. of the PTET. However, there will be a disconnect between the PTET benefit received by the income partners and the economic burden of the benefit which – in the absence of an adjustment of guaranteed payments to the income partners – will be fully borne by the partners. having equity.
I know I’m supposed to pay 100% estimated tax as if my entity did not make a PTET election, but if I don’t fully pay my estimates with the expectation of having to pay estimated tax penalties, is it that I can get the automatic six-month extension to file my 2021 taxes?
Sorry to ask a question we don’t know the answer to … but we don’t know. We will seek more advice from the tax department on this and let people know by April 15, 2022!
We will provide you with additional information and advice as we receive it.