As year-end 2024 approaches, it’s important to exercise tax planning opportunities wherever they can be found. With New Mexico’s shifts in how pass-through entities (PTE) file taxes—in 2022 and again in 2023—it’s important to ensure that you’re up-to-speed on the pass-through entity tax (PTET) provision which allows certain Limited Liability Companies (LLCs) entities— partnerships and S Corporations—to elect to pay their own entity-level New Mexico income tax liability, instead of requiring their owners to pay the entity’s tax on their personal tax returns.
What is PTET?
Pass-through entity tax (PTET) is an income tax that certain entities—specifically LLCs, partnerships, and S Corporations—elect to pay, to avoid the $10,000 deduction cap. The 2017 Tax Cuts and Jobs Act (TCJA) placed a $10,000 limitation on the amount of the deduction for state and local taxes (SALT) that could be deducted on personal returns, greatly impacting small and mid-sized businesses around the country.
To counteract the $10,000 deduction limitation, states—including New Mexico—passed their own legislation to convert what would otherwise be a limited or nondeductible itemized tax deduction into a strong business deduction.
Most states have a form of PTE level tax election as a workaround to the $10,000 TCJA state and local tax deduction limitation. The current exceptions are Pennsylvania, Washington, D.C., Delaware, Maine, North Dakota and Vermont. Pennsylvania has both Senate and House bills under consideration.
States with Enacted or Proposed Pass-Through Entity (PTE) Level Tax
What is a PTET Election?
New Mexico allows pass-through entities the opportunity to make an annual election that permits owners of these entities to circumvent the $10,000 state and local tax cap while remaining within the guidelines of the Federal law. The New Mexico election is binding on all owners of the electing pass-through entity.
In 2022, under New Mexico’s first PTET law, electing companies paid the tax, and the owners exempted the related income from their New Mexico tax returns. For 2023 and after, New Mexico shifted from an income exemption to a tax credit system where the company pays and deducts the tax, and the owners also report the company income and claim the company’s payment as a credit on their tax return. The PTET laws differ significantly in every state, though the credit method that New Mexico now uses, is the most common approach.
When are PTET payments due?
While New Mexico currently doesn’t require PTE’s to make payment of estimated state and local taxes during the year they are incurred, payment is required on or before the due date of the Federal tax return. The benefit of the PTET is enhanced if the 2024 tax is paid by December 31, 2024. This optional advance payment can be made with a 2024 payment voucher and it would be wise to consider making the estimated tax payment in late December 2024.
Unlike many states, New Mexico does not require quarterly estimated PTET payments. Instead, the company makes the election and pays the tax with its New Mexico income tax return. If the return is filed on an extension, the payment may be made with the extension.
New Mexico PTE Forms and Filing
Pass-through entities that would most benefit from entity-level filing — LLCs, partnerships, and S-corporations that anticipate paying more than $10,000 in state and local tax to New Mexico or those that have complex returns with multiple owners — need to ensure that they designate their election, file their returns, and make payments due according to all requirements as well as within the timeframes that most benefit the owners.
Please note that all linked forms below are those most recently published by the State of New Mexico.
How does the pass-through entity (PTE) make the election to be taxed directly?
Each PTE makes its election on the tax return forms that are filed by the entity. A section for calculating the entity-level tax is found within each return. These returns may be filed and paid electronically on the New Mexico’s Taxpayer Access Point (TAP) website. Organizations with more than 50 payees are required to file electronically.
- PTE Return – New Mexico Pass-Through Entities Tax Return (a.k.a. New Mexico form PTE). Instructions for 2023 PTE Tax Return
- S-Corp Return – New Mexico Sub-Chapter S Corporate Income and Franchise Tax Return
- FID-1 Return – New Mexico Fiduciary Income Tax Return
How does the PTE inform its owners of their filing information?
PTEs electing to pay the entity-level tax issue to their owners an Annual Statement to advise them of the election and the tax amount, and to attach to their NM income tax return.
- RPD-41359 – Annual Statement of Pass-Through Entity Withholding (Form 1099-Misc or a pro forma 1099-Misc may also be used if only pass-through entity withholding is being reported.)
This form will document the owner’s portion of the entity’s New Mexico net income, tax withheld, composite income tax paid, and any credit for entity-level tax.
What PTE forms are needed to make entity payments?
Different PTET remittance vouchers are required depending upon when the payments are submitted. Electronic payments may also be made within New Mexico’s TAP website.
- PTE-PV – Pass-through Entity Tax Return Payment Voucher
- PTE-ES – Pass-through Entity Estimated Payment Voucher
What other PTE forms may be useful?
Some situations may require that additional forms be submitted to New Mexico. These may include an authorization agreement when an owner resides outside of New Mexico, those who are recipients of oil and gas proceeds, or those requesting a refund or credit application to a subsequent year that had been withheld from a pass-through entity.
- RPD-41353 – Owner’s or Remittee’s Agreement to Pay Withholding on Behalf of a PTE or Remitter
- RPD-41354 – Declaration of Principal Place of Business or Residence in New Mexico
- RPD-41373 – Application for Refund of Tax Withheld from Pass-through Entities
New Mexico PTE Considerations
The New Mexico Taxation and Revenue Department (TRD) continues to provide guidance on the details of the PTE entity-level taxation process.
A few things to consider:
- The 2024 PTET payment is required to be 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: Individuals, estates, and trusts must add the PTET credit to their income, this eliminates the New Mexico income tax benefit of the deduction. However, the Federal tax savings will make this election worthwhile for many companies and business owners.
While many of the TCJA tax provisions will be sunsetting on January 1, 2025, it’s important to not lose sight of current opportunities to minimize your tax obligations. No one knows exactly how events will unfold in the new year, but what REDW’s trusted tax advisors can do is help you optimize today’s savings as we continue to work on planning for tomorrow.
Practical solutions for complex issues
For many businesses, state and local taxes are the most vulnerable areas in tax liability. Multistate taxation is highly complex, creating challenges as a company expands its multistate footprint.
REDW’s State and Local Tax (SALT) advisors are trusted and proactive in providing specialized expertise for multistate taxes, offering high-value consulting services that help growing businesses unearth tax-savings and achieve compliance in all 50 states.
Connect with our state and local tax team.
FAQs – NM PTET
Who needs to file PTET in New Mexico?
Typically, pass-through entities are not subject to tax themselves, rather taxation takes place at the owner’s level. New Mexico now permits pass-through entities to make an annual election to choose to pay state and local taxes at the entity level, then provide each owner the portion of income and tax withholding attributable to them.
While not required, this provision provides many owners with a significant benefit over previous filing methods since the enactment of the Tax Cuts and Jobs Act of 2017.
When are PTET payments due?
New Mexico PTET payments are due on or before the Federal Tax return due date of April 15th. Federal tax return extensions are honored by New Mexico and the due date of an extension would be its payment due date.
Owners filing their individuals tax returns electronically in New Mexico have an extended due date of April 30th.
Both individuals and PTEs may benefit from paying their estimated withholding tax and other taxes within the tax year, rather than waiting until the payment is required in the subsequent year. Your trusted tax professional can advise you regarding your specific situation.
How do I calculate PTET in New Mexico?
PTE entity-level tax is calculated by adding net income to guaranteed payments, subtracting the net capital gains deduction and distributions not subject to entity-level tax, then multiplying the result by the entity-level tax rate.
What forms do I need for New Mexico PTET?
Making a PTE entity-level taxation election is done within each tax return form, PTE, S-Corp, or FID-1. The PTE issues owners annual statements, providing them the information needed to complete their tax returns. PTE payment vouchers are used by the entity to remit the monies to New Mexico or they may be submitted on New Mexico’s Tax Access Point website.
Can I still elect PTET for previous tax years?
Single-owner pass-through entities may find it possible to change a PTET election for a prior tax year but would be governed by the forms and processes in place in New Mexico at that time. Multi-owner PTEs represent far more complex situations, although in either circumstance, it is best to work with a tax advisor to review your situation and help you decide what is possible and practical given your circumstances.
