Most New York restaurant owners cannot deduct their NYC and NYS taxes paid because they don’t itemize deductions for federal tax purposes. Even when they do itemize, their state and city deduction is limited to $10k, which is tiny compared to the state taxes a profitable restaurant owner pays. This can have devastating tax consequences for NYC restaurateurs who are already subject to double taxation (as explained in Maximize Tax Savings for your NYC Bar or Restaurant). However, there is a solution so that restaurant owners and investors can benefit from a federal tax deduction for the state and city taxes paid on their share of business income. This solution is deducting NY and NYC taxes paid by restaurateurs using the New York and/or New York City Pass-through Entity Tax (PTET).
NYS and NYC Pass-through Entity Tax (PTET)
NYS PTET
The NYS PTET allows a pass-through entity, such as an S corporation or partnership, to elect to pay NY state taxes on its income at the entity level instead of each partner or shareholder paying NY state taxes on their personal returns. As a result, the restaurant can deduct the NY state income tax as a business expense on its federal business tax return, thus having the deduction benefit flow to the partner’s or shareholders’ personal tax returns. This is a deduction that the partners or shareholders would otherwise not have received. The amount paid by the entity lowers the taxable income on each partner’s schedule K-1, and they can claim the credit on their personal returns for the taxes paid, so they’re not double taxed in NY on this same income. The huge advantage of this election is that the partner or shareholder is now indirectly receiving the benefit of a state tax deduction that they would not have received otherwise due to the itemized deduction limitations mentioned above.
NYC PTET
The NYC PTET functions the same as the NY PTET, but it is a separate tax since NYC double taxes pass-through entities (as explained in Maximize Tax Savings for your NYC Bar or Restaurant). The NYC PTET allows the restaurant/entity to pay the tax and thus be able to deduct it as a business expense, and allows the partners or shareholders to claim the NYC PTET paid on their NY personal tax returns as a credit. The NYC PTET is an optional tax that NYC S-corps and partnerships may annually elect to pay on their taxable income in addition to the general corporation tax (GCT) and unincorporated business tax (UBT) as outlined in Maximize Tax Savings for your NYC Bar or Restaurant.
Making the Election and Filing the PTET
Annual NY and NYC PTET Election
The NY and NYC PTET are administered by the New York State Department of Taxation and Finance, and the election must be made by March 15 of the year you want it to apply. To make the NYC PTET election on your tax return, you need to have an NYS PTET election in place (filed) with the State.
To make the election, log in to your NYS Department of Taxation & Finance account and go to PTET Web File under Corporation Tax (for corporations or S-corporations) or Partnership Tax (for partnerships), and select Pass-Through Entity Tax (PTET) Annual Election. Follow the prompts to opt into the NY and NYC PTET on behalf of your pass-through entity.
You must do this every year by March 15 for the year you are filing. For example, if you want to pay and claim the PTET for 2024, you must make the election by March 15, 2024.
Annual NY and NYC PTET Calculation and Filing
After the year ends, you must file and pay your PTET by the following March 15. For example, you must file and pay 2023 PTET by March 15, 2024. To do this, log in to your NYS Department of Taxation & Finance account, go to PTET Web File under Corporation Tax (for corporations or S-corporations) or Partnership Tax (for partnerships), and select Pass-Through Entity Tax (PTET) Annual Return. You must calculate your NY and NYC pass-through entity taxable income and input it into the pass-through entity tax calculation summary. You will calculate the pass-through entity taxable income using your federal tax numbers by populating the appropriate worksheets in the instructions. After you input the pass-through entity taxable income, the portal will calculate how much you owe for the year. See the example below for a PTET profiting $150k/year.
You will continue through the online process until you can finalize and pay the tax.
If your financials are not ready by March 15, select Pass-Through Entity Tax (PTET) Extension instead of Pass-Through Entity Tax (PTET) Annual Return when in the PTET Web File screen and follow the prompts to file an extension. You can also contact us to get your books in order, so you’re not scrambling during tax season and extending your filings.
Estimated NY and NYC PTET Taxes
PTET, like any other income tax, is a pay-as-you-go system. You must pay your PTET throughout the year via quarterly estimated taxes. Each quarterly payment should equal at least 25% of the required payment for the taxable year – the lesser of either 100% of last year’s PTET or 90% of this year’s PTET. If you did not opt into PTET last year, the required payment for the taxable year is 90% of the current year’s PTET tax, which will need to be calculated by your accountant. PTET estimated payments will only be applied to your PTET liability, and cannot be applied to any other taxes.
Estimated payments are due on or before March 15, June 15, September 15, and December 15 of the applicable year. If the due date falls on a Saturday, Sunday, or legal holiday, your payment is due on the next business day.
To pay the taxes, log in to your NYS Department of Taxation & Finance account each quarter, go to PTET Web File under Corporation Tax (for corporations or S-corporations) or Partnership Tax (for partnerships), and select Pass-Through Entity Tax (PTET) Estimated Payment. Follow the prompts to remit the estimated tax payments.
Final Words on the Pass-Through Entity Tax
If you do not itemize deductions on your NY or NYC business return, make sure to opt into the NY and NYC PTET by March 15 of the tax year. Don’t wait until tax time, or you’ll have missed the deadline for the current year. Opting into the NY and NYC PTET saves restaurant owners well over the standard deduction in tax dollars each year. If you have questions about how it works or want to know more about how the PTET can help you, schedule a call with an advisor at The Forks CPAs.
