Asset managers face a complicated tax environment in New York.
They must consider not just New York State (NYS) business taxes on
their management companies, their funds and themselves, but also
parallel New York City (NYC) business taxes. Sometimes these NYS
and NYC taxes are aligned, and sometimes they are not. In the case
of remote work, they are not. As we discuss below, remote work
presents an opportunity to reduce the New York tax burden on fee
income, but NYS and NYC each present their own considerations,
which must both be addressed to properly capitalize on it.
The pandemic forced many of us into a work-from-home experiment
that had no precedent or road map. Many companies then learned that
working from home is not only possible but, in some cases, quite
efficient. As a result, after leaving NYC in March of 2020, many
principals and investment professionals have decided they may stay
put and never truly return to their NYC offices. Some will work
from home and occasionally visit the NYC office, while others will
simply establish new offices closer to their primary residence.
This Legal Update reviews key NYC Unincorporated Business Tax
(UBT) and NYS Personal Income Tax (PIT) considerations-and
potential savings-that may arise from this shift. It focuses on
income sourcing concepts for partnerships under the UBT and PIT.
The sourcing regimes largely apply to management fee income, as the
UBT and PIT both have exemptions for self-trading income that
shelter carried interest income from tax, when structured properly.
Based on their current approaches to income sourcing, the UBT
automatically adjusts to remote work locations and the PIT does
not. NYS’s newly enacted “Pass-Through Entity Tax”
mirrors the PIT. We have discussed the Pass-Through Entity Tax in a
recent Legal Update. The PIT discussion in this Legal
Update applies primarily to nonresident partners because resident
partners are taxable on all of their income wherever earned.
Part 2 of this Legal Update will address the PIT considerations
that residents and nonresidents face at the individual level,
including some basics around residency changes, and the effects of
those changes on PIT liabilities. It will consider issues such as
sourcing carried interest income, bonuses and deferred payments in
years that involve residency changes, and establishing bona fide
home offices.
I. Some Basics
A. UBT
The UBT is a 4% tax on net income that is allocated and
apportioned to NYC. It applies to a base that is generally derived
from federal gross income and deductions, but has its own
definition of a taxable business-which notably excludes some
financial and real estate investment activities-and applies its own
modifications to income.1 The result is a tax that
conforms to many aspects of Subchapter K and the Internal Revenue
Code, but also has its very own concepts, construction and
application.
One mostly thinks of partnerships and limited liability
companies in relation to the UBT, but the tax also applies to sole
proprietors, trusts, and any other form of unincorporated
business.2 Whatever the form of business, determining
how much income the business earned in NYC is often the most
crucial determination. Many UBT filers do business inside and
outside NYC and therefore must “allocate” that income to
NYC to calculate the tax (most other state and local income taxes
use the term “apportion” for income that is attributed by
formula and the term “allocate” for income that is
attributed by source).3 NYC allocates income by using a
formula that results in a “business allocation
percentage” that represents the percentage of income a
taxpayer must attribute to NYC in any particular year for tax
purposes.
Until recently, the NYC allocation formula included three
factors-property, payroll, and gross income.4 Beginning
in 2018, however, the property and payroll factors no longer apply
and the NYC business allocation percentage is derived entirely from
the gross income factor.5 That means a business
determines its NYC income solely by reference to the percentage of
its gross receipts or sales that are attributable to NYC under the
UBT’s rules for sourcing gross income. For a services business,
such as asset management or law or accounting services, the place
of performance generally controls that determination because the
gross income factor sources fees for most services to NYC to the
extent the services were performed within NYC.6 Special
industry-specific rules provide a customer-based approach for
registered broker-dealers and mutual fund managers7 and
those exceptions are not addressed by this Legal Update. Further
flexibility may exist with respect to “other business
receipts” or “other reasonable method(s),” which we
have covered, in part, in this prior article.
B. PIT
The PIT is a graduated personal net income tax on residents and
nonresidents at the NYS level, and on residents at the NYC level.
Remote working has a greater potential impact on nonresidents than
residents (except to the extent a person changes their residency as
a result of remote work). This is because remote work may affect
the amount of both NYS sourced business income (i.e., Form K-1
income) and NYS sourced compensation (i.e., Form W2 income) that
nonresidents must report.
In contrast to the UBT, the PIT is more closely tied to federal
tax returns, at least for residents. It applies to federal adjusted
gross income with certain state-specific modifications.8
That means NYS and NYC tax all of a resident’s income wherever
earned on almost the same basis as the federal government, subject
to NYS credits for taxes paid to other state and local
jurisdictions.
The analysis is a little more complicated for nonresidents. NYC
does not tax nonresidents at all (which is a policy choice that
solidifies the UBT’s importance in NYC’s tax structure),
and NYS taxes nonresidents only on income earned within
NYS.9 Similar to the UBT, the PIT has complicated rules
that go into determining how much income is taxable in NYS.
To view the full article, please click here.
Footnotes
1. NYC Admin. Code § 11-501(k).
2. NYC Admin. Code § 11-501(m).
3. NYC Admin. Code § 11-508(a).
4. NYC Admin. Code § 11-508(c).
5. NYC Admin. Code § 11-508(i)(1).
6. NYC Admin. Code § 11-508(c).
7. NYC Admin. Code § 11-508(e-3).
8. NY Tax Law § 612(a); 20 NYCRR §
112.1.
9. NY Tax Law § 601(e).
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