It has been a few years now, April 2021, since New York State introduced the Pass Through Entity Tax (PTET) election option for small business owners. This was an innovative tax regime, and it continues to provide a great tax benefit for many individuals who are owners in pass through entities.

PTET offers a unique opportunity for pass-through entities to mitigate the impact of the federal SALT (State and Local Tax) deduction cap. Understanding the intricacies of PTET is crucial for business owners looking to maximize tax efficiency and compliance.

This article provides an overview of PTET, its purpose, implications, and key considerations for businesses operating in New York State.

The objective of PTET is to help mitigate the impact of the federal SALT deduction cap, which limits the amount of state and local taxes that individuals can deduct on their federal tax returns. PTET allows qualifying pass-through entities (S Corporations and Partnerships with at least one owner subject to NYS tax) to pay the state taxes at the entity level. This decreases the taxable income flowing to the individual, essentially giving them a deduction for state taxes that they would most likely not get due to the SALT deduction cap.

As a simplified example, an entity with $300,000 in NYS taxable PTET income would pay $20,550 in NYS PTET. This would reduce the income from the business being reported by the owners from $300,000 to $279,450. This saves the owners anywhere from approximately $4,000 to $7,000 in taxes, depending on their tax brackets. This tax savings most likely would be lost due to the SALT limitation if the full $300,000 in income flowed through to the owners. The $20,550 in taxes paid by the entity, then flow through as a credit on the owners New York State tax return so that there is no double taxation, and the savings from the deduction are true tax savings.

To qualify for PTET, a pass-through entity must be subject to New York State’s income tax, and have at least one individual owner or member subject to New York State personal income tax. The entity must elect into PTET each year by March 15, for that tax year. This election is done on the New York State Department of Taxation and Finance website at, www.tax.ny.gov/bus/ptet/.

PTET is calculated based on the entity’s New York source income and is paid at a rate ranging from 6.85% to 10.9%, depending on the entity’s taxable income. However, there are certain deductions and adjustments available to reduce the tax liability. For instance, eligible entities can deduct taxes paid to other states, as well as certain business expenses and credits, when calculating their PTE tax liability.

The SALT deduction cap is set to expire in 2025 if nothing changes… At that point, it will be questionable whether the PTET election will yield a benefit to business owners, it will depend on the Standard Deduction amounts and Alternative Minimum Tax.

Therefore, it could still be used as a tax savings strategy and will need to be looked at on an annual basis. Pass-through entities electing PTET must comply with all applicable reporting requirements, and deadlines set forth by the New York State Department of Taxation and Finance. Maintaining accurate records and fulfilling tax obligations in a timely manner is essential to avoid penalties or audits. The mechanics of, not only calculating, but reporting NYS addbacks and credits correctly will require the guidance of a qualified tax professional.

There can be administrative costs to this and so owners should review those administrative costs versus the benefit. PTET paid by the entity also creates implications for cash flow for the entity, as well as implications for allocations between partners and S Corporation shareholders. All of these items should be discussed with your tax professional.

In conclusion, if this is something you think you could benefit from, make sure you talk to your tax preparer soon. To benefit from this for the 2024 tax year you will need to make the election by March 15, 2024. This is an annual election therefore, each year you can determine if you want to make the election. Once you do make this election the entity is required to make quarterly estimates.

You do not want your best people walking out on you.

That is true of any business at any time – but it is especially true in today’s labor market. You don’t want your good people resigning because it might be extremely hard to replace them. If you are in the unfortunate position of losing some of your best employees, it may be worthwhile to take a look at how well you as a company are living out your core values in two key areas: hiring, and providing feedback.

First, hiring.

Qualified candidates are scarce right now for many positions. When you have an opening, you might get panicked or impatient as weeks pass without finding a candidate who has the necessary skills and experience for the job and who aligns with your core values. It is easy to rationalize that “somebody is better than nobody” and hire a candidate with the right resume even though they don’t appear to conform to the company’s core values.

The outcome is usually not a happy one. The person may be hardworking and productive, but if they don’t live out your core values, they are going to butt heads with your best employees – the ones who do great work and demonstrate your core values.

This leads us to the second area: providing feedback.

If you have a new or existing employee who is not living out your company’s core values, you need to give them redirecting feedback. That is, you should clearly identify the unwelcome behavior and its ramifications, and specify what needs to change and how. Many leaders shy away from providing feedback out of fear that it will upset the person and cause them to resign, leaving a hole to be filled. However, if you don’t speak out, you are tacitly condoning the behavior and giving the lie to your core values.

Once again, this isn’t going to upset the employee who doesn’t buy in to your core values … it is going to upset your best employees who really do value your core values. Given enough friction and frustration from fellow workers who don’t live out the business’s core values and who are not being held accountable for that failure, your best employees might decide to take their talents to a company that practices what it preaches.

So, before you hire someone who does not align with your core values … before you decide to tolerate behaviors that don’t match up with your core values … ask yourself: do you really want to risk having good people walk out on you? You know you don’t want that. Stick with your core values, and your best people will stick with you.