Support for Legislation that would modify PTET

SUMMARY

The State and Local Taxation Committee issued a report supporting legislation that would modify the New York State/New York City Pass-Through Entity Tax (PTET) Election due date. This bill would change New York State Tax Law (“Tax Law”) Sections 861 and 868 to allow a qualified pass-through entity (PTE) to make the State and City PTET election by September 15 of the tax year to which the election applies. Current law requires the election to be made by March 15 of the electing tax year. The bill would also modify Tax Law Sections 864 and 871 to require a proration of the PTE’s required estimated tax payments. 

As of January of 2024, thirty-six states (including New York State), and one city (New York City), have adopted a PTET, and most of those states allow this election to be made with the filing of the entity’s tax returns (typically March 15 or April 15 following the end of the applicable tax year) or the extended due date of the return. Modifications identical to those included in this legislation were previously enacted by the state for the 2022 tax year. Governor Kathy Hochul signed Bill A.10080 / S.8948 on May 6, 2022, which allowed the extension of the New York State and City PTET election to the 2022 tax year only. This legislation would in effect extend those provisions to all future years.

The Committee supports the legislation because it will better fulfill the legislative intent of making the PTET mechanism available to eligible New York businesses; it will allow existing taxpayers more time to assess the impact of the election and allow unincorporated businesses created after March 15 of a tax year to take advantage of the PTET program for that year; it will allow electing entities additional time to consider whether to revoke their PTET elections; and its impact will be revenue neutral. 

Originally Issued February 2024; Last Reissued May 2024

BILL INFORMATION

A.8451-A (AM Paulin) / S.8115-A (Sen. Skoufis) – Relates to the timing of annual tax elections (NYS 2023-24); A.8451 / S.8115 (NYS 2023-24)

REPORT

REPORT ON LEGISLATION BY THE STATE AND LOCAL TAXATION COMMITTEE

A.8451-A (M. of A. Paulin)
S.8115-A (Sen. Skoufis)

AN ACT to amend the tax law, in relation to the timing of annual tax elections.

THIS BILL IS APPROVED

The New York City Bar Association, by and through its State and Local Taxation Committee, supports this legislation which would modify the New York State/New York City Pass-Through Entity Tax (PTET)[1] Election due date and allow for the use of the annualization method when paying PTET estimates.

This bill would change New York State Tax Law (“Tax Law”) Sections 861 and 868 to allow a qualified pass-through entity (PTE) to make the State and City PTET election by September 15 of the tax year to which the election applies. Current law requires the election to be made by March 15 of the electing tax year. If passed, the legislation would be applicable for all tax years beginning on or after January 1, 2024.

The bill would also modify Tax Law Sections 864 and 871 to require a proration of the PTE’s required estimated tax payments. As stated in the proposed legislation, if a qualifying pass-through entity makes the New York State/New York City PTE election after March 15 and before June 15, the taxpayer will be required to make a 25% of the required estimated payment at the time of election; and if the taxpayer makes the election after June 15 and before September 15 the taxpayer will be required to make a 50% payment of the required estimate with the election.

Finally, the bill will allow qualifying entities to use the annualization method promulgated in New York Tax Law Section 685(c)(4) when calculating PTET estimates.

As of May of 2024, thirty-six states (including New York State), and one city (New York City), have adopted a PTET, and most of those states allow this election to be made with the filing of the entity’s tax returns (typically March 15 or April 15 following the end of the applicable tax year) or the extended due date of the return. Only one other state, Michigan, follows New York’s approach to require elections to be made by March 15 of the tax year to which the election applies. There are two other states that have required the election be made in the same tax year as the election. For tax years on or after January 1, 2020, Oklahoma designated February 15 of the tax year of the election the last date to make a PTET election; and Hawaii for tax years after December 31, 2023, has designated April 20 of the electing tax year as its PTET election date. A recent amendment to the Oklahoma pass-through entity tax effective in the 2024 tax year (L.2024, H3559) has amended the due date for making the PTET election to the due date of the electing entity’s tax return, including extensions.

Notably, modifications identical to those included in this legislation were previously enacted by the state for the 2022 tax year. Governor Kathy Hochul signed Bill A.10080 / S.8948 on May 6, 2022, which allowed the extension of the New York State and City PTET election to the 2022 tax year only. This legislation would in effect extend those provisions to all future years.

REASONS FOR SUPPORT

Extending PTET Election Due Date

In extending the election date for the PTET election, this legislation will better fulfill the legislative intent of making the PTET mechanism available to eligible New York businesses.  Extending the required election to September 15 of the tax year will allow existing taxpayers more time to assess the impact of the election and allow unincorporated businesses created after March 15 of a tax year to take advantage of the PTET program for that year. Without this change, unincorporated businesses formed after March 15 will continue to be precluded from making the PTET election.

In addition, modifying the PTET election due date to September 15 will allow electing entities additional time to consider whether to revoke their PTET elections. Tax Law Section 861 allows for a revocation of the PTET election by the electing taxpayer on or before the due date of the election.

Annualization Method

After electing to pay the New York State/New York City PTET, electing entities are required to pay quarterly estimates to avoid an underpayment of estimated tax penalty. The electing entity must pay quarterly the lesser of 90% of the PTET shown for the electing entity for the taxable year, or 100% of the PTET shown on the electing entity’s proceeding tax year. If the electing entity did not opt into the PTET the prior year, the current year’s tax must be used to calculate the estimates.

When the New York State PTET was originally enacted in 2021, it allowed for the use of the annualization method to reduce or eliminate underpayment penalties. However, in August of 2022, New York State, without clear justification or through legislation, modified its PTET rules to preclude the use of the annualization method when determining required estimates. The annualization income installment method allows taxpayers to refigure estimated tax payment installments to coincide with when the income is earned. Since the preclusion of the use of the annualization method, electing entities that do not receive consistent revenue throughout the year have been required to either rely on the preceding year’s PTET (which could be higher than current year PTET) or estimate its income for the year. Reauthorizing the use of the annualization method when calculating estimates for entities that make the PTET election will ease the burden and confusion on calculating estimates when the electing entity’s revenue stream is not consistent throughout the year or cannot be forecasted.

Revenue Neutral

The changes made in this legislation are revenue neutral. Both the New York State and City PTET regimes are designed to be revenue neutral (and based on how the tax and offsetting credits are structured, should result in a net increase in tax revenues for both jurisdictions).

CONCLUSION

 This technical correction is valuable tax reform that will benefit unincorporated New York State and City businesses. We support this legislation and urge its enactment into law.

State and Local Taxation Committee
Michael J. Hilkin, Chair

Reissued May 2024