NY PTET FAQ: Common Questions About Filing, Credits, and Payments

New York’s Pass-Through Entity Tax (PTET) is an optional tax allowing partnerships and S corporations to pay state income taxes at the entity level, potentially offering federal tax benefits. This election impacts business owners’ personal tax liabilities and requires careful planning.

Eligibility Criteria

Businesses structured as partnerships, S corporations, and certain LLCs taxed as partnerships or S corporations can opt into PTET. Sole proprietorships and single-member LLCs that are disregarded entities do not qualify. The entity must have at least one member subject to New York personal income tax for the election to be beneficial.

Partnerships, including general partnerships, limited partnerships, and limited liability partnerships, qualify if they have income from New York sources. S corporations must be recognized as such for both federal and New York State tax purposes. If an S corporation has made the election at the federal level but not in New York, it does not qualify.

For partnerships with nonresident partners, only New York-source income is subject to PTET. S corporations, however, calculate PTET based on all income, regardless of where it is earned. This distinction affects tax planning for shareholders who live outside New York.

Election Steps

Entities must opt into PTET annually through the New York State Department of Taxation and Finance’s online portal. The election is irrevocable for the year and must be made by March 15 of the tax year.

Only an authorized individual, such as a general partner, managing member, or corporate officer, can make the election. They must have the necessary login credentials for the state’s Business Online Services platform. Missing the deadline means waiting until the next tax year.

Once elected, the entity must make estimated tax payments in four equal installments on March 15, June 15, September 15, and December 15. Late or insufficient payments can result in penalties and interest.

Calculation Methods

PTET liability is based on the entity’s taxable income, ownership structure, and New York-specific adjustments.

Ownership Allocations

For partnerships, PTET liability is allocated based on each partner’s share of taxable income, as outlined in the partnership agreement. If no provisions exist, default allocation rules under IRC 704(b) apply. Special allocations must have substantial economic effect.

S corporations must allocate PTET liability strictly in proportion to each shareholder’s ownership percentage, as required under IRC 1366. Unlike partnerships, S corporations cannot make special allocations.

For example, if a partnership has three partners with ownership stakes of 50%, 30%, and 20%, and the entity’s taxable income subject to PTET is $1 million, the tax at a 9.65% rate would be $96,500. The partners would be responsible for $48,250, $28,950, and $19,300, respectively.

Adjusted Income Factors

The PTET calculation starts with the entity’s federal taxable income, adjusted for New York-specific modifications under NY Tax Law 612.

For partnerships, only income attributable to New York is subject to PTET. Nonresident partners are taxed only on their share of New York-source income, determined using apportionment rules under NYCRR 132.15. If a partnership operates in multiple states, it must apply New York’s allocation formula.

S corporations must compute PTET based on all income, regardless of where it is earned. This differs from partnerships and can result in a higher PTET liability for S corporations with significant out-of-state operations. If an S corporation has $2 million in taxable income, with 60% derived from New York, the full $2 million is subject to PTET. A partnership in the same scenario would apply PTET only to the $1.2 million New York portion.

Deductible Expenses

Entities electing PTET can deduct the tax paid at the federal level as a business expense under IRS Notice 2020-75, bypassing the $10,000 state and local tax (SALT) deduction cap imposed on individuals.

For example, if a partnership pays $100,000 in PTET, it can deduct this amount from federal taxable income, potentially reducing the owners’ federal tax liability. Assuming a combined federal and state marginal tax rate of 37%, this deduction could yield a tax savings of $37,000.

However, this deduction does not apply at the state level, meaning New York taxable income remains unchanged. PTET payments also do not reduce self-employment tax calculations for partners, as PTET is not deductible for self-employment tax purposes under IRC 1402(a).

Filing and Payment Requirements

Businesses electing PTET must adhere to strict filing and payment deadlines. The annual PTET return is due on March 15 of the following year, aligning with federal partnership and S corporation filing deadlines. Extensions are available for the return, but tax payments must still be made on time to avoid interest charges under NY Tax Law 684(a).

Entities must prepay at least 90% of their expected PTET liability through quarterly installments to avoid underpayment penalties. These penalties, assessed under NY Tax Law 685(c), are based on the state’s underpayment interest rate, which has ranged between 7% and 10% annually. Late payments accrue daily interest charges.

Electronic filing is mandatory for PTET returns, and payments must be made through the New York State Business Online Services platform. Paper filings are not accepted, and failing to submit electronically can result in processing delays or rejection. Businesses must also reconcile PTET payments with federal tax filings, ensuring deductions are properly reported on IRS Form 1065 or 1120-S and corresponding K-1 schedules.

Credit Application on Investor Returns

Once a pass-through entity has paid PTET, its owners can claim a corresponding credit on their personal New York income tax returns. This credit offsets the individual tax liability that would have otherwise been paid directly by the owners.

The PTET credit is reported on Form IT-653, which must be attached to the individual’s New York personal income tax return (Form IT-201 or IT-203 for nonresidents). The credit is available only to direct partners, members, or shareholders of the electing entity. Indirect owners—such as those in tiered partnership structures—do not qualify. If the credit exceeds the taxpayer’s New York personal income tax liability, the excess can be carried forward for up to three years but is not refundable.

For nonresident owners, claiming the PTET credit requires coordination with other state tax filings. Some states offer a resident tax credit for taxes paid to other jurisdictions, but not all recognize New York’s PTET as an eligible tax. This can create double taxation risks if the owner’s home state does not allow a credit for entity-level taxes.

For example, New Jersey and Connecticut generally permit a credit for PTET paid to New York, while California does not. Nonresidents should review their home state’s reciprocity rules and consider whether making estimated payments in their home state is necessary to avoid penalties.