Pass-Through Entity Tax Election – Don’t Wait Until Next Year to Decide
Sarah S. Kim, J.D., LL.M.
03.21.22 | SALT Chat
Leading up to March 15, I spent a lot of time advising clients in connection with the pass-through entity tax (PTET) election for the 2021 tax year—whether and how to make the election. With New Mexico having recently adopted a PTET legislation, currently, about half of the states have an optional PTET (except for Connecticut, which made it mandatory).
Navigating the Election
A couple of states, including New York, require a pass-through entity (PTE) that wants to elect into PTET to make the election by March 15 of the taxable year of election. For example, for the tax year ending December 31, 2022, the election deadline in New York was March 15, 2022. Most states, however, require an electing entity to make the election by the original or extended due date of the entity’s state or PTET return. For example, for the tax year ending December 31, 2022, the election deadline in New Jersey is March 15, 2023 (i.e., the original due date of the entity’s New Jersey Pass-through Business Alternative Income Tax (BAIT) return for calendar-year filers). The fact the election is not due until after the close of the tax year may mislead businesses to think that they can postpone the decision until a later time.
Most states that adopted PTET, however, require estimated tax payments. Therefore, to avoid underpayment of estimated tax payment penalty, an electing PTE must make estimated tax payments during the taxable year of election. The first quarter estimated tax payment is due either on March 15 or April 15 of the tax year, depending on the state. For example, for the tax year ending December 31, 2022, the first quarter New Jersey BAIT installment must be paid by June 15, 2022, although the election is not due until March 15, 2023 (the first quarter installment was originally due on April 15 of the tax year but New Jersey has extended the deadline to June 15 for the 2022 tax year). Also, making an online election is a prerequisite to making the estimated BAIT payments. Therefore, the NJ BAIT election is effectively due June 15, 2022, the deadline for the first quarter estimated PTET payment, for a PTE not to be subject to the underpayment penalty.
Watch for the Variables
PTET rules and mechanics vary among states. Some states require electing PTEs to file a specific election form to make the election. But in some states, the election is made by checking an appropriate box on the entity’s return. Note, in California, businesses that fail to make the required initial payment (i.e., the greater of $1,000 or 50% of the 2021 California PTET liability) by June 15, 2022, may not make the election for the 2022 tax year. No matter what the state rules are, the election decision should be made in conjunction with estimated PTET payment requirements imposed by the state’s PTET legislation. So now is the time to think about the 2022 election if you have not already done so.
If you need assistance with making a decision on the 2022 PTET election or PTET in general, please feel free to contact me at 646.346.6467 | firstname.lastname@example.org or reach out to your Berdon tax advisor.
Sarah S. Kim is a Senior Tax Manager in Berdon LLP’s State and Local Tax Group with nearly 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.