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Tax Implications of New York’s Budget Bill

April 26, 2021

KSM

New York’s 2021-2022 budget bill, which contains several personal income tax and corporate income tax changes, was signed into law by Gov. Andrew Cuomo on April 19, 2021. Most notably, by creating three additional brackets for high-income earners, New York will impose one of the highest personal income taxes in the country, especially when coupled with New York City’s rates. Additional highlights of the 204-page bill are as follows.

Temporary Personal Income Tax Rate Increase on High Earners

The legislation increases the personal income tax rates on higher incomes effective for tax years beginning in 2021 through tax year 2027, with the highest tax rate increasing to 10.90% from 8.82%. Rates are now as follows:

  • Married Filing Jointly: Income over $2,155,350 but not over $5,000,000 rate is 9.65%
  • Head of Household: Income over $1,616,450 but not over $5,000,000 rate is 9.65%
  • Single, Married Filing Separately, Estates, and Trusts: $1,077,550 but not over $5,000,000 rate is 9.65%
  • All Filing Statuses: Income over $5,000,000 but not over $25,000,000 rate is 10.3%
  • All Filing Statuses: Income over $25,000,000 rate is 10.9%

New Pass-Through Entity Tax Election

The bill includes the highly anticipated creation of a new pass-through entity (PTE) tax election, which effectively circumvents the $10,000 cap on the federal deduction for state and local taxes as enacted under the TCJA. The New York State PTE tax will operate in substantially similar fashion as other states’ PTE taxes by taxing the PTE while also passing income through to the PTE owner and offering a credit. The PTE tax would apply to tax years beginning on or after Jan. 1, 2021. Additional details include:

  • Election is made annually.
  • Annual election must be made by the due date of the first estimated payment for the current tax year.
    • First quarter estimates are due March 15.
  • An electing partnership or S corporation must pay the PTE tax in four equal installments on March 15, June 15, Sept. 15, and Dec. 15 in the calendar year prior to the due date of the required return.
  • PTE tax must be filed on or before March 15 following the close of the taxable year.
  • Once made, election is irrevocable for that calendar year.
  • For calendar year 2021, the election to pay the PTE Tax must be made by Oct. 15, 2021, and an electing entity is not required to make estimated payments for taxable year 2021. Partners, members or shareholders of electing entities should make estimated payments for 2021 as required by the personal income tax as though not entitled to the credit for the PTE tax for such year.

PTE tax rates are as follows:

PTE Taxable Income PTE Tax Rate
Not over $2,000,000 6.85%
Over $2,000,000 but not over $5,000,000 $137,000 plus 9.65% of the excess income over $2,000,000
Over $5,000,000 but not over $25,000,000 $426,500 plus 10.3% of excess income over $5,000,000
Over $25,000,000 $2,486,500 plus 10.9% of excess over $25,000,000

Considerations for the PTE tax credit are as follows:

  • Resident and non-resident partners or shareholders will be allowed a credit on their individual income tax return.
  • The credit will be equal to the partner’s or shareholder’s share of the PTE tax.
  • Excess credits will be treated as an overpayment and can be credited to next tax year or refunded.

Temporary Corporate Income Tax Rate Increase

In addition to raising taxes on individuals, the legislation increases the tax rates on corporate taxpayers with more than $5 million of taxable income effective for tax years beginning in 2021 through 2023.

Reinstatement of the Capital Base Tax

The budget bill reinstates the capital base tax for non-manufacturing corporations at a rate of .01875%. The capital base tax reinstatement terminates after Dec. 31, 2023. Small businesses as defined under New York law continue to be subject to a 0% rate.

What This Means for New York Taxpayers

New York taxpayers (both individuals and corporations) need to quickly consider the impact of the 2021 tax rate increases to avoid underpayment of estimated tax situations. Additionally, PTEs doing business in New York need to consider whether or not to make PTE elections before the October 15 deadline. Please reach out to your KSM advisor with any questions or complete this form.

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