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May 26, 2022

New York and California Pass-Through Entity Tax Election: June 15 Deadline Reminder

Passthrough entities and their owners need to act soon to take advantage of SALT Cap Workarounds (i.e., “Passthrough Entity Taxes,” or “PTETs”). In many states, timely estimated payments during the calendar year are a condition to making the election when the return is due (March 15 for most Passthrough tax returns). If you think you may benefit from this tax planning tool, read on for details about California and New York, and reach out to our SALT professionals if you have any questions about the mechanics of filing, calculating payments, or other states’ rules.

To read more about how California’s PTET works from our Insight Library, see here and here.

California’s PTET considerations

To make the election in California for tax year 2022, eligible entities must pay in the greater of $1,000, or 50% of the 2021 PTET liability, by June 15, using FTB 3893. Entities that fail to make this “safe harbor” payment will not be able to make the election on the 2022 tax return. (Note: The election can only be made on an entity’s timely filed original tax return.)

New York extends its 2022 PTET deadline

Previously, the deadline for making the 2022 election was March 15, 2022, but recent legislation not only extended the deadline but also increased the amount of benefit for resident S corporations. Under the prior legislation S corps could only make the election as to the portion of income that is sourced to NY; however, new legislation (A10080/S8948) enables S corporations, for which all owners are New York residents, to include income from all sources, which has the effect of increasing the amount of available credit on the individual owners’ returns. And because these rules went into effect after the PTET election due date for tax year 2022, New York extended its PTET election deadlines for all taxpayers. Now, passthrough entities can make their PTET election any time by or before September 15, 2022.

Accompanying the deadline extension is a new schedule of estimated payments, contingent on when the eligible entity makes the election. Taxpayers must still pay the entire amount of estimated PTET liability by the end of the year (90% of the PTET shown on the entity’s return for the taxable year; or 100% of the PTET shown on the preceding year’s return). However, instead of owing 25% each quarter (March 15, June 15, September 15, and December 15), taxpayers that make the election prior to June 15, 2022, only need to pay an amount equal to 25% of the required annual PTET liability by June 15, followed by 50% due in September, and the remaining 25% by December 15. And taxpayers that make the election after June 15 but before September 15, must submit a payment equal to 50% of the annual liability by September 15, with the other 50% due December 15.

You can find links here to make the election and submit payments online.

MGO’s insights

If you missed making the CA election on the 2021 return, the silver lining is that you can now “lock in” eligibility with a payment of only $1,000 on June 15, regardless of the amount of taxable income the entity ultimately reports. If you did make the election on the 2021 return, be sure to pay at least 50% of prior year liability (and consider adding a cushion for good measure), as there does not appear to be a “reasonable cause” exception to the rule.

And remember, most tax professionals have interpreted IRS Notice 2020-75 to allow the entity only to claim a deduction for the expenses actually incurred during the applicable tax year — regardless of whether the entity is on a cash or accrual basis accounting method. This means that if you intend to experience the full benefit of a state’s SALT Cap Workaround on your 2022 tax return, you will need to submit the full amount of PTET liability before the end of the year. Amounts paid after the end of the year but before the return deadline (March 15, for most taxpayers) will be deducted on the following year’s federal tax return regardless of when they are credited to state tax liability.

Thus, if the entity made the election in 2021 and paid the PTET before December 31, 2021, then it should (or should have already) claimed the entire amount of PTET credit as an ordinary expense deduction on its tax return (and reported on the owners’ K-1s, generally, line 13). But if the payment was submitted between January 1 and March 15, 2022, that payment, plus the upcoming payments, will be deducted on the 2022 return alongside the other payments made during the tax year.

Final perspectives

To take advantage of the 2022 CA and NY SALT Cap workarounds, make sure to submit your payment by June 15, 2022 for the California PTET, and your election and any necessary payments by September 15, 2022 for the New York PTET.

Only state PTET payments made during the entity’s fiscal tax year are deductible on that year’s federal tax return, so in addition to meeting the state’s minimum estimated tax requirements to ensure eligibility, consider making grossed-up estimated payments before year end to maximize the economic effect of the deduction on the 2022 return.

The PTET rules are different in every state, and with a near-constant stream of amendments and clarifications from state legislators and tax agencies, you may be unsure what is due when. MGO’s tax team can provide you with reminders for payment submission deadlines and calculate amounts due to help you navigate this opportunity for tax savings.

Please get in touch and see how New York, California, or another state’s PTET can benefit your business.