Frequently asked questions about the pass-through entity tax (PTET) (2024)

A partnership makes special allocations to some partners. How does the partnership compute PTE taxable income and the PTET credit pools?

If the partnership made special allocations, it must make appropriate adjustments to take into account those allocations in order to fairly represent the partners’ incomes. PTE taxable income and the PTET credit pools must reflect the relative contributions of each partner to the overall PTE taxable income and PTET paid. Note: Special allocations include guaranteed payments.

If the partnership did not make any special allocations of income or loss, compute PTE taxable income and PTET credits per TSB-M-21(1)C, (1)I, Pass-Through Entity Tax, which assumes no special allocations were made.

PTET must be allocated among nonresident and resident pool members by the eligible taxpayer’s profit and loss ownership percentage within the pool. If a non-equity partner receives guaranteed payments from a partnership, but does not have any profit or loss percentage, are the guaranteed payments included in PTE taxable income, and can the non-equity partner receive a PTET credit?

Guaranteed payments that are taxable by New York at the individual partner level must be included in PTE taxable income to the same extent. The partner will be allocated PTET credit related to these guaranteed payments.

Computing PTE taxable income and PTET credits, as defined in TSB-M-21(1)C, (1)I, Pass-Through Entity Tax, assumes the partners have no special allocations of income or loss. For purposes of computing PTE taxable income and the PTET credit, special allocations include guaranteed payments because these types of payments function similarly to special allocations. If special allocations are made, the partnership must make appropriate adjustments to reflect these allocations to fairly represent the partners’ incomes.

Can guaranteed payments paid to nonresident foreign partners for services performed outside the United States be included in the PTET?

Guaranteed payments to partners are included in PTE taxable income to the same extent they are taxable by New York at the individual partner level.

Can retirement payments to nonresident partners that are protected from nonresident state taxation by Section 114 of Title 4 of the United States Code be included in the PTET base?

Retirement payments that are not taxable by New York at the individual partner level are not included in PTE taxable income.

If one of the pools (resident or nonresident) is negative, will the overall PTE taxable income only be that of the positive pool (and not be reduced by the negative pool’s PTE taxable income)?

Total PTE taxable income of a partnership consists of the income of both nonresident and resident pools. A net loss within one pool will offset income in the other pool for purposes of calculating total PTE taxable income. Limitations related to negative pools, as described in TSB-M-21(1)C, (1)I, Pass-through Entity Tax, are only applicable to the distribution to eligible partners of the total PTET paid. Partners in the negative pool will not receive any PTET credit.

If Partnership A is owned by individual partners B and C, Partnership D, and S corporation E, how is PTE taxable income computed?

PTE taxable income is computed including only amounts that flow through to individual partners B and C that are taxable under Article 22. Income flowing to a Partnership D and S corporation E is not included in PTE taxable income.

If an electing upper-tier partnership receives income from a lower-tier partnership that elected in to PTET, can the upper-tier partnership include the lower-tier partnership’s income in PTE taxable income?

The upper-tier partnership would include in PTE taxable income any amounts flowing to partners that are subject to tax under Article 22, including any income received from a lower-tier partnership.

When a taxpayer claims a PTET credit on their personal income tax return, what amounts must the taxpayer add back?

The amount of the PTET credit claimed by the partners, members, or shareholders on their New York income tax returns must be added back only once, at the individual level, using addition modification A-219, Pass-through entity tax (PTET) deduction addback (IT-653, Pass-Through Entity Tax Credit) on Form IT-225, New York State Modifications. For more information on this addition modification, see the instructions for Form IT-225.

What PTET taxes must be added back on Form IT-225?

Tax Law section 612(b)(3) requires an addback of any income taxes claimed as a federal deduction in the current year less any amount added back under § 612(b)(43).

Example 1: An electing entity overpays its estimated taxes and receives a refund.

In 2022, an electing entity makes estimated payments of $100,000 for the 2022 PTET year. On March 15, 2023, the taxpayer files its 2022 PTET return and computes actual PTET due of $80,000. $80,000 is allocated to the eligible partners or shareholders as PTET credits. The electing entity receives a refund of $20,000 as an overpayment. The refund is issued in 2023.

The eligible partners or shareholders must add back, on their 2022 IT-225s, their share of $80,000 under § 612(b)(43), which is the amount of PTET credits claimed on their Article 22 tax returns.

The electing entity must add back on its 2022 IT-225, $20,000 under § 612(b)(3), which is the amount of federal deduction for the current year not added back under § 612(b)(43). This modification will flow through to the partners, members, or shareholders.

Example 2: An electing entity underpays its estimated taxes and pays the balance due with the PTET return.

In 2022, an electing entity makes estimated payments of $80,000 for the 2022 PTET year. On March 15, 2023, the taxpayer files its 2022 PTET return and computes actual PTET due of $100,000. The $20,000 underpayment is paid with the return. $100,000 is allocated to the eligible partners or shareholders as PTET credits. The additional $20,000 payment is treated as a deductible payment for the electing entity for federal purposes in 2023.

The eligible partners or shareholders must add back, on their 2022 IT-225s, their share of $100,000 under § 612(b)(43). Nothing is added back for tax year 2022 under § 612(b)(3) by either the partners or shareholders or by the entity.

Example 3: An electing entity underpays its estimated taxes and pays the balance due with the PTET return.

In 2022, an electing entity makes estimated payments of $80,000 for the 2022 PTET year. On March 15, 2023, the taxpayer files its 2022 PTET return and computes actual PTET due of $100,000. The $20,000 underpayment is paid with the return. $100,000 is allocated to the eligible partners or shareholders as PTET credits. The additional $20,000 payment is treated as a deductible payment by the electing entity for federal purposes in 2023. Additionally, in 2023, the entity makes $50,000 in estimated PTET payments for 2023. The entity claims a total federal tax deduction for 2023 of $70,000.

On March 15, 2024, the entity files its 2023 PTET return and computes actual PTET due of $50,000. No refunds are issued and no additional payments are made with the return. $50,000 is allocated to the partners or shareholders as 2023 PTET credits.

The eligible partners or shareholders must add back, on their 2023 IT-225s, $50,000 under § 612(b)(43). Nothing is added back for 2023 under § 612(b)(3) by either the partners or shareholders or by the entity, since the $20,000 additional payment for 2022 was added back on the 2022 Article 22 tax returns under § 612(b)(43).

What pass-through entity taxes paid to other states must be added back on an individual's IT-225?

All pass-through entity taxes paid by an electing entity to taxing jurisdictions other than New York on behalf of partners, members or shareholders must be added back at the individual level. Any tax paid for which a Resident Tax Credit (RTC) is claimed must be added back on the individual’s IT-225 under § 612(b)(43) using modification code A-220. Any remaining deductions must be added back under § 612(b)(3) using modification code A-201.

The entity must provide each partner, member, or shareholder a statement including the individual’s share of all taxes paid to each taxing jurisdiction other than New York on behalf of the Article 22 taxpayer. These taxpayers must use this information to determine the proper modifications on their IT-225s.

What pass-through entity taxes are added back when the electing entity computes PTE taxable income?

For PTE taxable income computation purposes only, an entity must add back all pass-through entity taxes paid and deducted for federal purposes in the current year, including taxes paid to New York or to other jurisdictions.