New York, Pennsylvania Demonstrate Complexities With PTE Taxes

Pass-through entity taxes can provide a significant benefit in the form of federal tax savings. However, they can also be fraught with complexities that create risk.

Thirty-six states, plus New York City, have passed laws enacting a PTE tax. Maine, Pennsylvania, and Vermont have bills pending. Though they have different PTE tax statuses, Pennsylvania and New York state are both struggling with state-specific complexities.

New York

New York’s PTE tax is one of the most cumbersome in the country. The New York annual election deadline is March 15 of the year the election relates to. For example, a PTE tax election for tax year 2023 must be made by March 15, 2023.

This timing is significantly earlier than that of most other states, which have election deadlines in the year following the year the election relates to—for example, a March or September 2024 deadline for tax year 2023. Also, fiscal year filers must follow the same due dates as calendar year filers.

All New York PTE tax elections and filings must be made on the New York Department of Taxation and Finance’s website through the taxpayer’s online services account. Only an authorized person can make the election, and New York specifies that tax professionals may not make elections on behalf of clients.

This puts the entire filing burden on non-professionals. In addition, the filing includes providing information for all individual partners/shareholders eligible to claim credits. Entities with more than 100 claimants must upload a data file in a specified format. Entities can’t change any information once the return is submitted, and incorrect or incomplete information can result in the disallowance of PTE tax credits for individual claimants.

The New York PTE tax treats resident and nonresident individual owners differently in terms of the income includable by each, which isn’t unusual among state PTE taxes. What is unusual, however, is that New York also treats partnerships and S corporations differently.

Specifically, the PTE tax base includes all income of resident partners that is subject to personal income tax. But for resident S corporation shareholders, only New York source income is included. That is unless the S corporation elects to be treated as an “electing resident S corporation,” which is only available if all shareholders are New York residents.

Addback rules, which are particularly complex, are another nuance of New York’s PTE tax, as there are implications at both the member level and the entity level. For example, members must add back any credit they claim on their state income tax return.

Electing entities must add back the amount of any current year federal deduction not added back at the member level (that is, the amount of any overpayment). Entities must also add back all PTE taxes paid and deducted federally for purposes of the state PTE tax taxable income computation.

Adding to the struggle, New York makes frequent changes to its guidance. For example, New York recently made the previously irrevocable PTE tax election revokable until the due date of the first estimated payment, clarified that zero returns can’t be filed to revoke an election, and added states to the list of “similar” PTE taxes for credit purposes, among others.

New York can help resolve some of these issues by first simplifying the administration of the tax. Allowing paid preparers and commercial software to file PTE tax returns and estimates, as well as making payments, will take the burden off individuals who are unfamiliar with such filings and processes.

New York can also simplify the tax’s calculation. For example, equalizing the tax base for partnerships and S corporations eliminates the need for a separate resident S corporation election, and provides equal treatment to partners and S corporation shareholders.

Pennsylvania

Increasingly widespread knowledge of the PTE tax’s potential benefits is making it more difficult for outliers such as Pennsylvania to avoid the tax, as is the pressure to retain wealthy residents.

One benefit of Pennsylvania’s delay is that it can benefit from lessons learned elsewhere. Specifically, Pennsylvania can be proactive in addressing considerations identified in other states. These considerations include the tax’s effective date.

Although some states have enacted PTE taxes mid-year and made them effective retroactively, this has not been done without aggravation. Relevant questions related to the effective date include:

Are estimated payments required? If so, how are they calculated, and when are they due? Can other payments already made by either the entity or the owners be recharacterized as PTE tax payments? Other considerations include:

Will nonresident withholding be required by electing entities? Will nonresident owners of an electing entity have an individual filing requirement? If so, can these owners satisfy that requirement by participating in a composite return?

Also significant is the credit to Pennsylvania residents for their share of PTE taxes paid to other states; many states have included such a provision in their legislation. This would be especially significant in Pennsylvania, as partners in partnerships don’t receive a credit for their share of PTE taxes paid to other states.

S corporation shareholders, on the other hand, do receive a credit. This disparity must be remedied legislatively, and new PTE tax legislation could be an ideal opportunity.

New York and Pennsylvania continue to struggle with PTE taxes as the time window for taking advantage of these tax regimes dwindles. The state and local tax deduction limitation is scheduled to sunset at the end of 2025, and many state PTE taxes are directly tied to the federal provision. This means that if the federal limitation sunsets, the PTE tax will automatically expire. Federal proposals range from increasing the limitation significantly to eliminating it altogether.

What will transpire before the end of 2025 remains to be seen. Until then, we contend with the complexities in states like New York and monitor developments in holdouts like Pennsylvania.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Cynthia Galamgam is a state and local tax senior manager at CohnReznick LLP.

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