In 2022, New Mexico adopted a pass-through entity tax (PTET) provision, allowing certain Limited Liability Companies (LLCs) – partnerships and S Corporations to elect to pay their New Mexico income, in lieu of their owners paying the tax. Most states now have a form of this election. The election allows the owners of certain LLCs, partnerships, and S Corporations to convert what would otherwise be a limited or nondeductible itemized tax deduction into a strong business deduction. For 2022, electing companies paid the tax and the owners exempted the related income from their New Mexico tax returns. For 2023, New Mexico switched from an income exemption to a tax credit system—the company pays and deducts the tax and the owners claim the company’s payment as a credit on their tax return.
Unlike many states, New Mexico does not require quarterly estimated PTET payments. The Company makes the election on and pays the tax with its New Mexico income tax return. If the return is filed on an extension, the payment is made with the extension. This means it is not too late to make this election for 2023.
For 2024, the benefit of the PTET is enhanced if the 2024 tax is paid during 2024. This optional advance payment is made with a 2024 payment voucher. It would be wise to consider making the 2024 payment in late December 2024.
As of this publication, the New Mexico Taxation and Revenue Department (TRD) has not yet provided guidance on the details of the new 2023 law. They plan to include information in the tax forms and instructions, which have been approved but not yet released.
A few things to consider:
- The 2023 PTET payment is made with the company’s timely filed tax return or extension.
- The PTET is an election. It is made on the company’s New Mexico income tax return.
- The tax rate is 5.9% of the income apportioned to New Mexico.
- Apportionable income includes guaranteed payments, except for health insurance.
- If the company has New Mexico capital gain that is allocable to owners who are people or trusts, the company should deduct 40% of those allocations when computing its PTET payment.
- Income and guaranteed payments allocable to governments, Tribes, and 501(c)(3) organizations are excluded.
Note that individuals, estates, and trusts must add the PTET credit to their income, eliminating the New Mexico income tax benefit of the deduction. However, the federal tax savings will make this election worthwhile for many companies and owners.
