BILL NUMBER: S7643

SPONSOR: GOUNARDES
 
TITLE OF BILL:

An act to amend the tax law, in relation to the limitation on the pass-
through entity tax credit and the city pass-through entity tax credit

 
PURPOSE OR GENERAL IDEA OF BILL:

This bill would reduce the available credits claimed by all partners,
members or shareholders of an partnership or S corporation electing to
pay the pass through entity tax from 100% to 87%

 
SUMMARY OF PROVISIONS:

Section One amends § 863 of the Tax law to reduce the available State
pass through entity tax credit from 100% to 87%

Section Two amends § 870 of the Tax law to reduce the available City
pass through entity tax credit from 100% to 87%

              

Section Three provides for an effective date

 
JUSTIFICATION:

The vast majority of businesses in NYS are organized as pass-through
entities (PTEs), which means that the business's income "passes through"
to its owners or members, who then report it as taxable dividends on
their personal income tax (PIT) returns. Most businesses favor the PTE
model because it helps them avoid double taxation, in which corporate
franchise tax is paid at the entity level on top of PIT paid by the
business's owners on the dividends distributed to them by the entity.

In the FY22 budget, NYS created a new pass-through entity tax (PTET)
where, in a total reversal of the traditional flow-through taxation
model, the firm withholds and remits income tax on the dividends owed to
its shareholders at the entity level instead of passing the dividends on
to the shareholders for them to then report on their PIT returns. The
PTE is then issued a credit which it must allocate amongst all its
owners to offset the taxes that they've already effectively paid at the
entity level. The business can then also deduct the income tax that it
pays to the state from its federal taxes, greatly lowering its federal
tax liability while cleverly circumventing the $10,000 cap on federal
tax deductions for state and local taxes created in the 2017 Tax Cuts
and Jobs Act (TCJA) that the PTE's owners would otherwise be subject to.

For example, let's say a pass-through entity such as an S corps has two
resident shareholders and a total business income of $1,000,000.  The S
corps elects the PTET, which has a rate of 6.85% for this level of taxa-
ble income, so the S corps remits a PTET of $68,500 to the state. The
state then issues the S corps a corresponding credit back of $68,500,
which will be split between the two shareholders as a $34,250 credit
that each claims on their personal income tax returns.  The corporation
has not gained any kind of advantage from electing the PTET at the state
level, since they received a credit back for exactly the amount they
paid, and the PTET is thus revenue neutral to the state. The S corps is
able, however, to deduct the $68,500 they have paid in PTET from their
federal tax return, lowering their federally taxable income to $931,500
($1,000,000 - $68,500). This allows the S corps to circumvent the
$10,000 federal cap on state and local tax deductions that would other-
wise apply.

Due to the PTET being optional the rebate must be large enough that the
election provides a net benefit to an electing taxpayer. That is to say,
for taxpayers in the top tax bracket, with a federal income tax rate of
37%, they must receive at least a 63% credit to break even. With New
York State currently providing a 100% credit, many of the highest
earners in New York are owners of pass-through businesses and take
advantage of the PTET to reduce their federal income tax liability.

This legislation would reduce the PTET credit against the Personal
Income Tax by 13 percent, to an 87 percent rebate. This would put New
York in line with Massachusetts, which rebates 90 percent of its version
of the PTET, and Connecticut, which rebates 87.5 percent of its version
of the PTET

 
PRIOR LEGISLATIVE HISTORY:

None

 
FISCAL IMPLICATIONS:

This bill would raise approximately $1.75 billion in tax receipts

 
EFFECTIVE DATE:
This act shall take effect immediately