On March 8, 2022, New Mexico Governor Michelle Lujan Grisham signed HB 102, creating an annual elective entity-level tax for New Mexico pass-through entities (PTEs).
Like many other PTE taxes, this tax is designed to allow the PTE owners—partners, members, and shareholders of the PTE—to take advantage of the federal deduction for state and local taxes paid at the entity level.
Eligible Entities and Partners
New Mexico’s regime is broader than that of some states by allowing most partnerships, S corporations, and limited liability companies (LLCs) to make the election.
Publicly traded partnerships, investment partnerships, and single-member LLCs aren’t eligible nor is any entity electing to be taxed as a C corporation at the federal level.
The only excluded PTE owners are corporate partners that are unitary with the underlying partnership. In addition, PTEs don’t calculate tax on income that’s allocable to government, Tribal, or Section 501(c)(3) entities.
Tax Calculation
The PTE tax is calculated based on the PTE’s New Mexico sourced income. Tax is calculated at the higher of the maximum marginal rate for either individuals or corporations.
For 2022, the highest marginal rate for corporations and individuals is the same—5.9% of taxable income, which will be the applicable rate against New Mexico-sourced income if the PTE tax is elected.
PTE Election Availability
New Mexico’s election will become available beginning tax year 2022. The election may be made with a return filed on or before the original or extended due date, as applicable.
Entity tax payments also need to be made on or before the original due date of the US federal income tax return for a year in which the election is made—March 15, 2023, for calendar-year PTEs making the election for the 2022 tax year. Any tax payments made by the PTE as nonresident withholding for the year may be converted to entity-level tax payments.
Exclusion Regime and Effects on PTE Partners
New Mexico PTE owners may exclude the New Mexico-sourced portion of their distributive share of income from the PTE.
While not addressed in the legislation, it appears that a New Mexico nonresident with no other income sources in New Mexico won’t need to file an individual New Mexico return if the PTE makes the tax election.
New Mexico residents will need to file a return in New Mexico because the income from the PTE not sourced to New Mexico must still be reported by the individual partner.
Approach Elections with Caution
The economic benefit of this election depends on the specific situation and should be discussed with your tax advisor.
Care should be taken to understand the risks of possibly losing or reducing the benefit of other tax attributes such as the Section 199A deduction, trapping tax attributes such as net operating losses at the entity level, or the separation, at different levels, of income and offsetting deductions such as depletion (particularly important for oil and gas partnerships) or losses from other investments.
Given the complexities of PTE elections, the impact should be modeled before the PTE decides to elect.
We’re Here to Help
For guidance on PTEs in New Mexico, contact your Moss Adams professional.
You can also visit our tax planning resource page to learn more.