New York City has adopted a PTET and California has made changes to its PTET provisions.  Twenty-two states have already adopted PTET provisions for their residents. This is an example of how states and localities are joining the PTET bandwagon to give their residents a work-around on the $10,000 Federal cap on the deductibility of state and local taxes.  

New York City PTET

The NYC PTET is effective January 1, 2023 for eligible entities. The tax rate is a flat 3.876%.

Eligible Entities

Eligible entities include partnerships, LLCs and NYS S corporations with only NYC resident shareholders.

Election

For partnerships and LLCs, the election may be made by an authorized partner or member.  For eligible S corporations, the election may be made by an authorized officer.  The NYC PTET election must be made by a NYC resident individual.  The election is irrevocable and must be made annually.  It is due by March 15^th of the year for which the NYC PTET is applicable.

Pass-through Entity Income

For partnerships, LLCs and S corporations, the NYC PTET is based on the sum of all items of income, gain, loss or deduction to the extent included in the NYC resident’s taxable income.

Filing Due Date

The PTET return is due March 15^th of the year after the tax year closes.  The extended due date is September 15^th.

Estimates

Estimates are due on March 15^th, June 15^th, September 15^th and December 15^th.  Estimates are payable for the calendar year during which the tax year ends.

Credits

NYC individual residents are entitled to a credit against their NYC personal income tax equal to their direct share of the entity’s NYC PTET.

Modifications

For NYS personal income tax purposes, and additional modification must be made to NYS income equal to the amount of the NYC PTET credit.

California PTET

On February 9, 2022, Governor Gavin Newsome signed into law many tax-payer friendly changes to the California PTET.  These changes include:

• Allowing a qualified entity to have a partnership as a partner
• Allowing a taxpayer holding their interest as a disregarded single member of limited liability company (SMLLC) to be a qualified taxpayer
• The California franchise tax board has previously indicated that Grantor trusts are qualified taxpayers
• Guaranteed payments are now included in the tax base
• Allowing the PTET credit to reduce the regular tax below the tentative minimum tax
• Changing the ordering of the PTET credit utilization to be after the other state tax credits for the 2022 tax year

The amendments are retroactive to January 1, 2021, with the exception of the credit ordering rule.  The new law significantly expands the population of business entities eligible to make the PTET election and alleviate concerns about utilization of the PTET credits.  The new law does not make the credit refundable nor does it reduce the non-resident withholding requirement.  It also does not increase the PTET rate (9.3%) to the maximum personal tax rate of 12.3%.

Many taxpayers may now want to consider the PTET election.  As with any election, taxpayers should review their own situation to determine whether a PTET election would be beneficial to them.

If you have any questions regarding the New York City and California PTET provisions, please consult your Perlson LLCprofessional at(516) 541-0022.