What Small Businesses Need to Know About Pass-Through Entity Tax (PTET)

As a small business owner in New York, staying informed about tax services and regulations is crucial for optimizing your tax strategy. One key consideration for 2025 is the Pass-Through Entity Tax (PTET). This tax offers a way for eligible businesses to manage state tax liabilities while potentially reducing federal tax burdens. 

Here’s a comprehensive guide to help you navigate PTET in 2025.

What is PTET?

The Pass-Through Entity Tax (PTET) is an optional state tax that allows eligible pass-through entities (PTEs), such as partnerships and S corporations, to pay state tax at the entity level. Instead of passing income through to individual owners—who would then be subject to the federal cap on state and local tax (SALT) deductions—PTET allows businesses to deduct the full amount of these taxes at the federal level.

Key Benefits of PTET

• Avoid SALT Cap: Businesses can fully deduct state and local taxes, bypassing the $10,000 federal cap.
• Federal Tax Savings: By shifting tax payments to the entity level, businesses can reduce their overall federal taxable income, potentially lowering tax liabilities.
• Simplified Compliance: PTET consolidates state tax payments, reducing the burden for businesses with multiple owners.

Eligibility and Election Process

Who Can Elect PTET?

• Partnerships and S corporations in New York are eligible.
• Sole proprietors and C corporations are not eligible for PTET.

How to Opt In

• The PTET election for 2025 must be made by March 15, 2025, through the entity’s Online Services account.
• Once made, the election is irrevocable for that tax year.
• A proposed change in the 2025-26 New York state budget could extend the deadline to September 15, offering businesses more flexibility in deciding whether to opt in.

Tax Rates and Filing Requirements

PTET Tax Rates

New York’s PTET tax rates are progressive, ranging from 6.85% to 10.9%, depending on taxable income. The higher the taxable income, the higher the rate applied.

Filing and Payment Deadlines

• Annual PTET Return: Due by March 15 of the following year. A six-month extension is available.
• Quarterly Estimated Payments: Required throughout the year to avoid penalties.
• Even if no tax is owed, businesses must still file a PTET return to remain compliant.

PTET Credits for Business Owners

Owners of pass-through entities receive a PTET credit on their personal New York State income tax returns for the taxes paid at the entity level. This helps offset individual state tax liabilities, reducing the risk of double taxation.

For personalized tax planning and advisory services, small business owners should consider consulting a tax professional to ensure compliance and maximize tax benefits. Explore tax advisory services to get expert guidance on your PTET election.

Best Practices for Small Businesses

1. Work with a Tax Professional

• PTET rules can be complex, so partnering with a tax advisor can help ensure compliance and maximize potential savings.
• A professional can also evaluate whether PTET is the best option based on your business’s structure and financial situation.

2. Maintain Accurate Records

• Keep detailed documentation of PTET elections, payments, and credits.
• Ensure proper record-keeping to support tax filings and audits.

3. Monitor Regulatory Changes

• Stay updated on potential changes to PTET laws, including election deadlines and tax rates.
• Sign up for tax service alerts or work with an advisor who can keep you informed.

Summary

PTET provides small businesses in New York with a strategic way to manage state and local tax liabilities while potentially lowering federal tax burdens. By understanding the election process, tax rates, and benefits, businesses can make informed decisions about whether PTET is the right choice for them in 2025. Consulting with a tax professional ensures compliance and maximizes tax savings opportunities.

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