New York Partnership Tax Guide: IT-204, Nonresident Partners & NYS PTET
Federal Foundation: Form 1065 Feeds Everything
The New York partnership return doesn’t exist in a vacuum. It starts with the federal Form 1065, which reports the partnership’s total income, deductions, gains, losses, and credits. The partnership itself doesn’t pay federal income tax — it’s a pass-through entity. Each partner receives a Schedule K-1 showing their allocated share, and that share flows to their individual return.
What makes this relevant to New York is that the state return takes federal numbers as its starting point and then applies New York-specific modifications. If the federal return is wrong, the New York return is wrong too. And if the K-1 doesn’t properly break out New York-source income from non-New-York-source income, your nonresident partners’ state returns will be wrong as well.
Partners are taxed on their distributive share — the income allocated to them under the partnership agreement — regardless of whether cash was distributed. A partner with a 25% interest in a partnership that earned $800,000 reports $200,000 of income even if the partnership didn’t distribute a dollar. This matters in New York because the state taxes that allocated income if it’s sourced to New York, whether or not the partner ever saw the cash.
Form IT-204: New York’s Partnership Return
Form IT-204 is the New York State partnership return. Every partnership and LLC taxed as a partnership that has income derived from New York sources, or that has a resident partner, must file IT-204 with the New York State Department of Taxation and Finance.
The return is due March 15 for calendar-year partnerships, the same deadline as the federal return. Extensions are available. Late filing carries penalties, and the calculation varies — New York can assess a penalty based on the number of partners, similar to California’s per-partner penalty structure.
IT-204 requires the partnership to report total income and then break out the New York portion. The partnership must provide each partner with a New York K-1 equivalent showing their share of New York-source income, New York additions, New York subtractions, and New York credits. Resident partners report all partnership income on their New York returns but get a credit for taxes paid to other states. Nonresident partners report only their New York-source partnership income.
The K-1 Detail Matters
New York partners need more than just a federal K-1. The IT-204 K-1 equivalent must break out New York additions, subtractions, and source-specific income. If you hand a nonresident partner a federal K-1 and nothing else, they can’t file an accurate New York return — and you haven’t met your reporting obligations.
New York-Source Income: The Rules for Nonresident Partners
New York taxes nonresident partners on income derived from New York sources. For a partnership, that means income from business carried on in New York, income from real property located in New York, and gains from the sale of real property or partnership interests connected to New York business activities.
The sourcing rules for service businesses use an allocation formula based on where the services are performed, where the customers are located, and other factors. If your partnership has employees or offices in New York, some or all of the service income will be New York-source. A consulting firm with a Manhattan office and clients in five states needs to calculate how much income is attributable to New York.
Real estate income is simpler: rental income from a building in Brooklyn is New York-source income, full stop. Capital gains on the sale of New York real property are New York-source. But gains on the sale of a partnership interest can get complicated — New York has rules that “look through” the partnership to the underlying assets, so if the partnership owns New York real estate, selling the partnership interest can trigger New York-source gain even if the seller lives in another state.
Investment income is treated differently. If a nonresident partner’s share of partnership income is purely from stocks, bonds, or other intangible investments — and the partnership doesn’t have a regular place of business in New York — that income may not be New York-source. But the line between “investment partnership” and “business partnership” isn’t always obvious, and getting it wrong can cost real money.
Nonresident Partner Withholding and Estimated Tax
New York requires partnerships to file estimated tax on behalf of nonresident partners who don’t individually consent to file New York returns. This is handled through Form IT-2658, which requires the partnership to estimate each nonresident partner’s New York-source income and make quarterly payments at the highest marginal rate.
The alternative is a Group Return (Form IT-203-GR), where the partnership files a single return on behalf of all qualifying nonresident partners. This simplifies things but only works if the nonresident partners meet certain conditions — they can’t have other New York-source income, and their only New York filing obligation must be from this partnership.
Nonresident withholding is not optional. If the partnership fails to withhold or file estimated tax for its nonresident partners, and those partners don’t file and pay on their own, the partnership itself can be held liable. We’ve seen this happen to partnerships that assumed their out-of-state partners would handle it themselves. Some did. Some didn’t. The partnership ended up writing a check to New York for the ones who didn’t.
Don’t Leave It to the Partners
Assuming each nonresident partner will handle their own New York filing is a risk. If they don’t, the partnership is on the hook. Either withhold using Form IT-2658 or file a Group Return — pick one and do it consistently.
The NYS PTET: New York’s Pass-Through Entity Tax Election
New York’s pass-through entity tax is the state’s response to the federal $10,000 SALT deduction cap. The NYS PTET allows eligible partnerships and S corporations to pay an entity-level state income tax. Partners then claim a credit on their individual New York returns, and the entity-level payment is deductible for federal purposes — bypassing the SALT cap.
The NYS PTET rates are graduated, matching the individual rates:
- 6.85% on income up to $2 million
- 9.65% on income between $2 million and $5 million
- 10.30% on income between $5 million and $25 million
- 10.90% on income over $25 million
The election is annual and must be made by March 15 of the tax year (not the filing year — you’re electing for the year in which you’ll earn the income). This is a planning deadline, not a compliance deadline. If you miss March 15 of the current year, you can’t go back and elect for that year. Estimated payments are due quarterly: March 15, June 15, September 15, and December 15.
One detail that’s worth flagging: the NYS PTET credit is fully refundable on the individual New York return. This is different from California’s PTET, where the credit is nonrefundable. The New York refundable credit means partners won’t lose the benefit even if their New York tax liability is low — they’ll get the excess back as a refund. That makes the election attractive for a wider range of partnerships than California’s version.
The partnership also needs to consider the interaction with the NYC PTET if it has New York City resident partners. The NYC PTET is a separate election with its own rules, and a partnership can elect both the state and city PTET simultaneously. We cover the city-level election in our NYC Partnership Tax Guide.
New York Additions and Subtractions
New York doesn’t fully conform to the Internal Revenue Code. The IT-204 requires adjustments for differences between federal and New York tax law. Common additions include interest income from other states’ municipal bonds (exempt federally and in the issuing state, but taxable in New York) and certain depreciation differences where New York requires its own calculation.
Common subtractions include interest on U.S. government obligations (taxable federally, exempt in New York) and certain New York-specific adjustments for qualified emerging technology investments. The additions and subtractions flow through to each partner’s K-1 and affect their individual New York returns.
Getting these wrong usually doesn’t create large dollar differences for most partnerships, but they do affect the accuracy of the return. And if you’re already doing the work of filing IT-204, getting the additions and subtractions right is straightforward — it’s just a matter of knowing which federal items New York treats differently.
Partner Basis: Federal vs. New York
Because New York doesn’t conform to every federal provision, partners can have different federal and New York basis amounts. The most common divergence comes from depreciation — when New York requires its own depreciation schedule, the basis in partnership assets (and therefore the partner’s outside basis) can drift from the federal number over time.
This matters when a partner sells their interest or receives distributions that approach their basis. A partner might have $50,000 of federal basis but only $40,000 of New York basis — meaning a $45,000 distribution that’s tax-free federally triggers $5,000 of New York gain. These situations aren’t common for most partnerships, but they show up regularly in real estate partnerships and partnerships that took advantage of federal bonus depreciation provisions New York didn’t adopt. Our K-1 and basis guide walks through the federal mechanics.
Filing Mistakes New York Partnerships Make
The most common mistake is failing to file IT-204 at all. Some partnerships assume that because they don’t owe entity-level tax, they don’t owe a state return. That’s wrong. The information return is required, and skipping it means partners don’t get proper New York K-1 data and the partnership faces penalties.
Not handling nonresident withholding is a close second. Partnerships with a mix of resident and nonresident partners need to either withhold via IT-2658 or file a Group Return. Ignoring this obligation puts the partnership at risk of paying the nonresident partners’ taxes plus penalties.
Missing the PTET election deadline is expensive because it’s irrevocable for the year. The March 15 election date is easy to confuse with the filing deadline. They’re the same date, but the election is for the current year while the filing is for the prior year. If you’re electing PTET for 2026, that election must be made by March 15, 2026 — not when you file the 2026 return in 2027.
Failing to break out New York-source income on the K-1 equivalents creates problems downstream. If a nonresident partner in New Jersey gets a federal K-1 with no New York breakdown, they can’t file an accurate New York nonresident return. The partnership has to provide that information.
Overlooking the NYC layer is another gap. If the partnership does business in New York City, there’s a separate set of obligations — the Unincorporated Business Tax and potentially the NYC PTET. Filing the state return and skipping the city is incomplete.
Planning for New York Partnerships
The PTET election should be evaluated every year. Tax rates change, partner income levels change, and the benefit depends on each partner’s full tax picture. A partner who’s already under the $10,000 SALT cap doesn’t need the workaround. A high-income partner in Manhattan who also owes NYC taxes gets more benefit. Model it for each partner before electing.
Multi-state partnerships should coordinate New York filing with other state returns. Partners who live in states with reciprocal credit agreements can offset some of the New York tax on their resident returns, but the mechanics differ by state. New Jersey, Connecticut, and Pennsylvania residents with New York partnership income face this regularly — and the calculations aren’t straightforward when PTET elections are in play in multiple states.
Partnerships with real estate in New York should track New York basis separately from day one. The differences compound over time, and reconstructing New York basis at the point of sale is expensive and error-prone. Our advisory practice includes annual basis tracking for real estate partnerships.
If your partnership is considering adding or removing partners, the New York implications should be part of the conversation. Changes in ownership can affect the allocation of New York-source income, trigger filing obligations for new nonresident partners, and change the PTET calculation. Don’t finalize ownership changes without modeling the state tax impact. See our main Partnership Tax Guide for the federal framework around ownership changes.
Frequently Asked Questions
What is Form IT-204, and does every New York partnership need to file it?
Form IT-204 is the New York State partnership return filed with the Department of Taxation and Finance. Every partnership and LLC taxed as a partnership that has income derived from New York sources or that has a New York resident partner must file IT-204. This includes partnerships organized in New York, partnerships with offices or employees in New York, partnerships that own New York real estate, and partnerships where at least one partner is a New York resident. The return is an information return — the partnership itself doesn’t pay income tax on it — but it’s the vehicle for reporting each partner’s share of New York income, additions, subtractions, and credits. The filing deadline is March 15 for calendar-year partnerships, matching the federal Form 1065 deadline. Extensions are available through Form IT-370-PF. The return must include New York K-1 equivalents for each partner with their New York-source income broken out. Skipping the filing because the partnership doesn’t owe entity-level tax is a common mistake — the information reporting obligation exists regardless. The IRS Publication 541 covers the federal partnership framework, and our Partnership Tax Guide explains the federal return structure. For city-level obligations, see our NYC Partnership Tax Guide.
How does New York tax nonresident partners on partnership income?
New York taxes nonresident partners on their share of income derived from New York sources. If the partnership operates in New York, owns New York real property, or has employees performing services in New York, the income attributable to those activities is New York-source income taxable to all partners — including those who live in other states. The partnership is responsible for either withholding estimated tax on behalf of nonresident partners using Form IT-2658 or filing a Group Return (Form IT-203-GR) that covers all qualifying nonresidents. The withholding is computed at the highest marginal rate on the nonresident partner’s estimated New York-source income. If the partnership doesn’t withhold and the nonresident partner doesn’t file and pay, New York can hold the partnership liable for the tax, interest, and penalties. For service businesses, New York-source income is determined by an allocation formula based on factors including where the services are performed and where the clients are located. For real estate partnerships, the sourcing is straightforward — rental income and sale proceeds from New York property are New York-source. The federal K-1 instructions explain the allocation framework, and the IT-204 instructions detail the New York-specific breakouts. Our basis and K-1 guide covers how these allocations affect partner-level reporting, and our team can model the withholding for multi-state partnerships.
What is the New York PTET, and how do the estimated payments work?
The New York State PTET is an elective entity-level tax that allows partnerships to pay New York income tax at the partnership level rather than having partners pay it individually. The entity-level payment is deductible for federal purposes, which bypasses the $10,000 SALT deduction cap. Partners claim a fully refundable credit on their individual New York returns for their share of the PTET paid. The rates are graduated: 6.85% on income up to $2 million, 9.65% on income between $2 million and $5 million, 10.30% on income between $5 million and $25 million, and 10.90% on income over $25 million. The election must be made by March 15 of the tax year — not the following year’s filing deadline. Estimated payments are due quarterly: March 15, June 15, September 15, and December 15 of the election year. The first estimate must equal at least 25% of the required annual payment. Underpayment penalties apply if estimates are insufficient. Unlike California’s PTET, the New York credit is refundable, meaning partners get any excess credit back as a refund rather than carrying it forward. This makes the election beneficial for a wider range of partnerships. The IRS Publication 541 provides the federal pass-through background. Our advisory services include annual PTET modeling.
Can a partnership elect both the NYS PTET and the NYC PTET?
Yes. The New York State PTET and the New York City PTET are separate elections, and a partnership can make both simultaneously. The NYS PTET covers New York State income tax, while the NYC PTET covers New York City income tax — they apply to different tax obligations and have different rate structures. Making both elections gives partners credits against both their state and city individual tax liabilities. The NYC PTET election has its own deadline and its own estimated payment schedule, separate from the state-level election. Partners who live in New York City and are subject to both state and city individual income taxes can benefit from both elections. Partners who live outside the city but have New York City-source income (through the Unincorporated Business Tax or otherwise) should model the city election separately. The interaction between the two elections, plus any other state’s PTET election, needs to be coordinated — especially for partners who are residents of other states and may claim credits on their home state returns. The NYS PTET page has the state election details, and the NYC PTET page covers the city election. Our Partnership Tax Guide ties the federal and state pieces together, and our team handles combined PTET modeling for dual-election partnerships.
What happens if a New York partnership doesn’t file Form IT-204?
Failing to file Form IT-204 exposes the partnership to penalties from New York State and creates downstream problems for every partner. The state can assess late-filing penalties calculated on a per-partner basis, which adds up quickly for partnerships with many members. Beyond the penalty, not filing means partners don’t receive proper New York K-1 information, which means their individual New York returns — whether resident or nonresident — are filed without accurate New York-source income data. Nonresident partners who file inaccurate New York returns because the partnership didn’t provide New York-specific K-1 data face their own audit risk. The partnership also hasn’t met its withholding obligations if it has nonresident partners — without the IT-204 framework, the IT-2658 estimated payments and Group Return options aren’t properly connected. In audit situations, IRS Publication 541 and the Form 1065 instructions establish the federal baseline, but New York conducts its own audits independently. A partnership that filed the federal return but skipped the state return is a visible gap. The penalties, combined with interest on any resulting underpayment by partners, make the cost of non-filing much higher than the cost of compliance. Our Helpful Guides section covers related filing requirements, and our distributions and contributions guide explains how state filing gaps affect basis tracking.
Work With The Reed Corporation
Need help with New York partnership returns, nonresident withholding, or PTET election planning? Our NYC-based CPA team files these returns every day.