New York's 2022-2023 Fiscal Year Budget includes pass-through entity tax changes, new tax credits

Updates to New York PTET For S Corporations 

• Effective for tax years beginning on or after Jan. 1, 2022, there is a revised definition of who qualifies as an “electing S Corporation.” The definition now has two components, the first for an “electing resident S Corporation” and the second for an “electing standard S Corporation.”
  • An “electing resident S Corporation” will possess all resident members at the time the election is made, and an “electing standard S Corporation” will remain the default classification should the entity not meet the standard of an “electing resident S Corporation” during the year in question. 
  • When an entity qualifies as an electing resident S Corporation, their taxable income will include all items of income, gain, loss, or deduction to the extent these items are also included in the taxable income of their resident members.
  • Electing standard S Corporations include such items in their taxable income only to the extent that these items are derived from or connected with New York sources.

New York City PTET 

• The Act creates the City of New York PTET, effective for tax years beginning on or after Jan. 1, 2023.
• The City PTET closely mirrors the State PTET, permitting eligible “city partnerships” and eligible “city resident S Corporations” to make an irrevocable election to pay tax at the entity level in a similar method as the NYS PTET election. 
• The NYC PTET will have a flat rate of 3.876%, and a credit will be available to resident partners, members, and shareholders against their personal income tax in an amount equal to their share of the NYC PTET paid on their behalf. 
• The NYC PTET does not replace the NYC Unincorporated Business Tax, or the NYC General Corporation Tax, but is an optional additional tax.

New York State and New York City PTET Add Back 

• The Act makes amendments to Section 612(b)(3), requiring an addback of income taxes, to the extent that such taxes are deductible for federal AGI purposes and not credited against federal income tax.
• The Act has added an additional subsection, Section 612(b)(3)(C), which provides that “income taxes” do not include the NYS PTET, or any other substantially similar pass-through entity tax of another state, to the extent these taxes are added back under the Section 612(b)(43) PTET deduction addback. 
• These changes effectively eliminate any confusion over a double addback that was previously questioned at the individual level.

Creation of new tax credits and incentives

• Farm Employee Overtime Credit: This new credit is available to qualifying farm employers for up to 118% of the eligible overtime per qualifying farm employee times the overtime rate paid by the eligible farm employer. This credit is determined on an employee-by-employee basis, and taxpayers have the opportunity to request an advance payment of this credit from the Department. This credit is available for tax years beginning on or after Jan. 1, 2022. 
• Student Loan Forgiveness Modification: The Act creates a subtraction modification for tax years beginning on or after Jan. 1, 2022, from New York income any amount of student loan forgiveness granted by the state that is otherwise included in federal AGI. 
• COVID-19 Capital Costs Credit: This credit is permitted for qualifying business for costs related to qualified COVID-19 “capital costs” incurred from Jan. 1, 2021, through Dec. 31, 2022, for businesses located within the state. The credit is equal to 50% of qualified COVID-19 capital costs. Credits cannot be less than $1,000. 
• NYC Child Care Credit: This credit is available for child care seats that were created or expanded. The amount of the credit is dependent upon the number of seats created or expanded on and other eligibility criteria.   
• Various Energy Credits are created by the Act, such as the Conversion from Grade No. 6 Heating Oil Usage to Biodiesel Heating Oil and Geothermal Systems Credit and the Geothermal Energy Systems Credit.
• Homeowner Tax Rebate Credit: Eligible low- and middle-income taxpayers and qualifying senior households receiving School Tax Relief (STAR) or Enhanced STAR are eligible for a credit. 
• Cannabis Subtraction Modification: A subtraction modification was created for an amount equal to any federally disallowed deduction relating to IRC Section 280E for the production and distribution of adult-use cannabis products, for tax years beginning on or after Jan. 1, 2022. 

Expansion of existing credits

• Farm Workforce Retention Credit
• Investment Credit for Farmers
• NYC Musical and Theatrical Production Credit
• Hire-A-Vet Credit
• Low-Income Housing Tax Credit
• Clean Heating Fuel Credit
• Transportation for Persons with Disabilities Credit
• Empire State Film Production and Post-Production Credits
• Youth Jobs Program Credit
• Empire State Apprenticeship Credit
• Alternative Fuels Credit
• Electric Vehicle Recharging Property Credit
• Workers with Disabilities Credit
• Restaurant Return to Work Credit
• Supplemental Empire State Child Credit
• Earned Income Tax Credit
• Enhanced Earned Income Tax Credit

Personal income tax rate changes

Subpart A of the Act is updated to accelerate the middle-class tax cuts. Tax rates based on taxable income and filing status have been modified for the middle-class tax brackets.

Small business subtraction modification

• The Act made changes to the small business subtraction modification effective for tax years beginning on or after Jan. 1, 2022, for taxpayers who are members of a qualifying limited liability company, partnership, or New York S Corporation that qualifies as a small business, increasing the subtraction modification to 15%.
• Qualifying small businesses and small farming businesses include:
  
  • Sole proprietors with one or more employees and less than $250,000 of net business or net farming income
  • Owners of a limited liability company, New York S Corporation, or partnership with one or more employees and less than $250,000 in net farming income 
  • Owners of a limited liability company, New York S Corporation, or partnership with one or more employees and less than $1,500,000 in New York gross business income that is non-farming 
• The definition of “New York gross business income” is dependent upon the entity type. 

Alternative Minimum Tax changes 

• The Act modified for years beginning on or after 2021 but before 2022 the supplemental income tax imposed on certain individual taxpayers.
• For taxpayers with New York AGI above $25,000,000, there is an additional tax due at a rate of 10.9%.

The NYS Budget Act provided substantial changes to entity-level and individual taxes, and it’s critical for businesses to review these changes to evaluate the NYS tax implications. Further, for those businesses/individuals that have opted into the elective NYS PTET tax, consulting with your tax advisor to confirm how these new changes impact such election is highly recommended.

Corey L. Rosenthal, JD, Principal, Practice Leader, State & Local Tax Services

646.625.5729

Arvinder Kaur, CPA, Senior Manager, State & Local Tax Services

646.448.5466