In the blog I posted below more than a year ago, we tried to answer what was a pressing question about how far the New York based credit rules go and whether New York residents can get the Connecticut pass-through -Pay (or actually) corporation tax Another state’s PTE tax could apply for a New York resident tax credit for those taxes. Sixteen months later, there is still no direct answer to this question, although I continue to believe that there is some authority under current law to claim such a loan. But earlier this week, as part of the governor’s budget proposal for 2021 and buried in provisions about a new PTS tax for New York (which we’ll cover in a separate blog post, don’t worry), there’s this change to Section 620 Taxes ::
“A resident shall be granted a credit for any tax otherwise payable under this Article for any transit tax that is substantially the same as the tax levied under Article 24A of this Chapter [the new tax law section for New York’s new PTE tax] on the income of a partnership or sub-company whose partner, member or shareholder is levied on derived income for the tax year in another United States state, political division, or the District of Columbia and is taxable under this article. ”
So there you have it. The catch? It won’t take effect for tax purposes until 2022, when the New York through tax also comes into effect! So New Yorkers still have to wonder if PTE taxes paid between 2018 and 2021 have had or could be credited.
Original post – September 23, 2019
Last week, the Massachusetts Department of the Treasury released a policy (Policy 19-1) announcing its position that its residents can apply for credit for taxes paid by transit agencies under the Connecticut PET, the Connecticut workaround for the federal cap for states and municipalities, tax deductions. Practitioners with New York clients have asked the same question, but the New York Tax Department has not yet provided similar guidance.
What do we think from this corner? Again, the question arises whether a New York resident can apply for a Section 620 Tax Credit for the portion of PET tax paid on their behalf.
Under Section 620 (a) of the Taxes Act, a resident is granted credit “for any income tax levied by any other state in the United States for the tax year. . . according to the income derived therefrom and taxable under this article. “Interestingly, the language of the law does not specifically suggest that the tax should be paid directly by the individual taxpayer. In addition, there is a specific provision in Section 620 (d) of Taxes relating to shareholders of S-Corporation that clarifies that the term “income tax” as used in subsection (a) of Section 620 Taxes “does not include any tax on or is charged by the company. “So, from one perspective, it would appear that this S-Corporation spin-off would not be required if the 620 (a) law prohibits the application of a corporate-level tax credit. Since the Tax Act Section 620 (a) does not specifically mandate that the tax be payable by the individual taxpayer, a reasonable conclusion can be drawn that income tax paid by a partnership or limited liability company is tax-deductible at the corporate level under Section 620.
As mentioned above, unfortunately there are no official tax authority publications or tax return instructions that contain this guide. One reason for this could be that there are concerns that such a public position could actually undermine what Connecticut is trying to do and therefore cause more harm than good. For example, as we noted in our November 2018 article on PET tax, this gives the IRS more grounding in claiming that the partner is receiving domestic credit for the tax paid by the transit office in their home state, “tax” was really here on the partner, not on the company? As previously reported, the IRS’s silence on the matter leads some to conclude that it is not attacking these type of workarounds for passthrough entity tax in the same way that they attached the workarounds for charitable deductions.
For what it’s worth, I spoke to an officer in the tax department and was told that the tax department didn’t take a formal position on the matter. However, it has provided informal guidance to the taxpayers who asked the question. This guide reads as follows: “If you believe the taxpayer is eligible for a credit, the credit may be included in the tax return and a position disclosure statement should be included.” Something like this likely works for one Statement:
“The taxpayer is seeking credit for $ ____ $ in income tax paid to the state of Connecticut on his behalf [INSERT NAME OF ENTITY]. Because this Connecticut tax was paid by the Company on Connecticut income and income that is taxable under this article, the taxpayer believes that Section 620 of the Tax Act allows credit to be made. ”
Given the tax authority’s ambivalence on this issue, I would surmise that the tax authority will not actively seek to deny taxpayer-claimed credits for Connecticut transit tax, at least not for taxes paid by partnerships or LLCs. However, due to the specific spin-off for S-Corporation shareholders in Section 620 (d) Taxes Act, it is less likely that an S-Corporation shareholder will be able to claim credit for the corporation tax paid by the S-Corporation. Even so, and given the department’s relative silence on the matter, even S-Corporation shareholders might consider taking the approach outlined above, that is, taking out the resident loan but attaching a statement with the return of the position.
Of course, none of this constitutes binding legal advice. Probably best for you not to get this from a blog!