29 January 2016 New York State and City corporate tax reform likely affects 2015 tax liability for regulated investment companies With the 2015 filing season just beginning, regulated investment companies (RICs) are reminded that recent, dramatic New York State and City corporate tax law changes are likely to affect the determination of a RIC's 2015 state and city corporate tax liability. Specifically, RICs that are subject to tax in New York State may see an increase in the minimum tax they owe, notably because the maximum tax was raised from a relatively low $5,000 maximum to $200,000 (depending on the amount of their New York-sourced receipts). Similarly, RICs subject to tax in New York City may see an increase in their minimum taxes because of an identical increase in the maximum minimum tax from $5,000 to $200,000. Calculating this tax liability may require a significant investment of time and effort for some RICs. These tax law changes most likely will affect fixed-income funds (including money market funds) but also may apply to some assets that equity funds hold. A RIC with New York State and City nexus is subject to New York State and City corporate tax based on the higher of the tax determined under the following two tax bases: (1) its business income base; or (2) a fixed-dollar minimum tax base. In calculating its business income base for both New York State and City corporate tax purposes, a RIC may claim a dividends-paid deduction, just as it does for federal income tax purposes. Consequently, most RICs' business income will be zero (or close to zero), leaving RICs that are subject to tax in New York generally subject only to the fixed-dollar minimum tax. The fixed-dollar minimum tax is based on the amount of a RIC's New York State- and City-sourced receipts. For tax years beginning before January 1, 2015, a RIC was subject to a maximum $5,000 fixed-dollar minimum tax in both New York State and City. For tax years beginning on or after January 1, 2015, however, the fixed-dollar minimum tax at both the New York State and City levels range from $25 for a taxpayer with New York-sourced receipts totaling not more than $100,000 and up to $200,000 for taxpayers with New York-sourced receipts over $1 billion. See Attachment 1 for a table listing all of the ranges. Further, under the recent New York State and City tax reform legislation, New York-sourced receipts are determined generally by looking to where the customer is located, which, in the case of a sale of securities, would be the location of the counterparty to the transaction. This customer sourcing regime now requires a RIC to undertake a complex review of its assets in order to determine its New York-sourced receipts to which the fixed-dollar minimum tax applies. Under the New York State and City corporate taxes, a RIC must determine the New York-sourced receipts from its assets based on either a fixed percentage of its income and gains from those assets or an actual tracing approach, depending on the type of asset. Dividends and gains from the sale of stock and partnership interests generally are excluded from New York-sourced receipts. Income and gains from most other RIC assets, however, are included if attributable to New York sources. See Attachment 2 for a summary of the sourcing rules. As seen in Attachment 2, the sourcing rules are very detailed and will require manual determinations in many instances. Many companies may not currently be capturing much of the information needed to apply the new rules. As a result of these changes, RICs that are subject to tax in New York may spend significant time and effort determining their fixed-dollar minimum tax liability. RICs may need to classify all of their assets under the categories in the new rules (loans, corporate bonds, etc.). It is unlikely that RICs already capture all necessary information in security-reference files. Further, for certain asset categories, RICs will have to trace the source of their receipts. For example, for assets that are classified as loans, RICs will need to determine whether or not loans are secured by real property, the location of any real property used as security and, if the loan is not secured by real property, the location of the borrower and purchaser (if the RIC sells the loan). In summary, compliance with the new rules will be challenging at best. Accordingly, RICs should work with their tax adviser to identify available information and determine what additional information is required to compute New York-source receipts.
Document ID: 2016-0207 | |||||||||||||
