06 June 2018 New York State issues unincorporated business tax bill discussion draft as part of response to federal tax reform On May 16, 2018, the New York State Department of Taxation and Finance (Department) released a discussion draft proposing a new unincorporated business tax (UBT, under proposed new Article 24-A) on partnerships doing business in New York, with a corresponding tax credit for individual and corporate partners of those partnerships. According to the Department, the proposal responds to the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and is structured both to preserve federal income tax deductibility for individuals on certain non-wage income and to maintain state revenue levels.1 Connecticut recently enacted a pass-through entity tax (see Tax Alert 2018-1142) and other states are considering similar proposals. If enacted, the UBT generally would take effect for tax years beginning on or after January 1, 2019. With its proposal, the Department released a summary document that includes explanatory examples of how the UBT would apply. Interested parties are invited to provide feedback on both the statewide UBT generally as well as the structure of the proposed UBT by July 16, 2018. For tax years beginning on or after January 1, 2019, a 5% UBT would apply to the unincorporated business taxable income (UBTI) of every affected partnership doing business in New York, in addition to any other taxes imposed.2 The UBT would be allocated to New York State using a three-factor allocation percentage that includes property, payroll and an income percentage that would follow the current allocation rules under Article 22 of the Tax Law. As proposed, unincorporated business net income (UBNI) would be the sum of: (1) federal ordinary business income3 of the affected partnership; (2) taxes paid or incurred during the tax year by the affected partnership to the extent deducted in computing federal ordinary income; and (3) the affected partnership's guaranteed payments to its partners (under IRC Section 707(c)). UBTI would be the sum of: (1) the affected partnership's UBNI (or loss);4 and (2) any UBNI of a lower-tier partnership5 sourced to New York by the lower-tier partnership. An affected partnership for purposes of the UBT would mean any partnership as defined by federal tax law,6 including a limited liability company treated as a partnership for federal income tax purposes. The Department is seeking input on: (1) the UBT's structure, noting that it could be structured as a franchise tax with two or three alternative bases, such as a capital base or fixed-dollar minimum base; (2) whether the tax should be made optional (noting it could exempt smaller partnerships by exempting UBTI below a specified threshold); (3) whether the tax should apply to New York S corporations, sole proprietorships and single member limited liability companies that are owned by individuals; and (4) what the rate should be. The discussion draft includes three credit provisions that would apply to: (1) tiered partnerships, (2) individual resident and nonresident partners subject to tax under Article 22 of the Tax Law, and (3) corporate partners that are subject to corporate franchise tax under Article 9-A of the Tax Law.7 Regarding tiered partnerships, the unincorporated business credit (UBC) would provide a credit to an affected partnership that is a partner in a lower-tier partnership against the tax imposed. This would be calculated by multiplying the affected partnership's ownership percentage of a lower-tier partnership by the larger of either the lower-tier partnership's UBT or UBC. For an affected partnership that has a direct ownership interest in more than one lower-tier partnership, the UBC would be the sum of the credits calculated for each of its lower-tier partnerships. In this situation, the UBC would not be refundable and excess credits could not be carried forward. In its summary document, the Department notes that instead, the affected partnership's partners receive the benefit of their distributive shares of the full UBC in calculating their own credits, even the portion that the affected partnership is not able to use (giving the next partnership in the chain the full benefit of the UBC of the lower-tier partnership). Additionally, as indicated previously, a taxpayer subject to either personal income tax (Article 22) or corporate franchise tax (Article 9-A) that is a partner or corporate partner, respectively, in an affected partnership subject to the UBT would be able to claim a UBT credit to offset tax liability under Articles 22 or 9-A. The personal income tax credit would equal the taxpayer's ownership percentage of the affected partnership, multiplied by 93%, multiplied by the greater of either the UBT or the UBC of the affected partnership.8 In discussion draft comments, the Department noted that the 93% discount factor is designed for state revenue neutrality, but it would consider adjusting it based on each individual payer's effective tax rate instead. Taxpayers with direct ownership of a partnership interest in multiple affected partnerships would calculate the total credit by adding their credits together. As proposed, the credit could be carried forward indefinitely but would not be refundable. Similarly, a corporate partner in an affected partnership would be able to calculate a corporate franchise tax credit for its share of UBT paid on income that flows to that partner.9 The credit would be calculated the same way as the personal income tax credit, but it would not be applied against the fixed-dollar minimum. The UBT payment would be due on the 15th day of the third month after the close of the tax year (March 15 for calendar-year taxpayers), reported on the IT-204 partnership return. Affected partnerships would be required to report to each partner its distributive share of the UBNI, the UBTI and the UBT imposed on the affected partnership, and the UBT credit of the affected partnership.10 Partnerships would be required to make estimated tax payments toward their UBT liability, due on March 15, June 15, September 15 and December 15,11 once a partnership reasonably expects to owe $1,000 or more. Only the affected partnership, rather than partners, would be liable for the UBT. The UBT would incorporate Article 22 procedural provisions, unless a UBT provision is specifically inconsistent or is irrelevant. For audit or enforcement purposes, the Department would be permitted to disclose UBT calculations, UBC calculations or information about tax remitted to the Department to any partnership in a tiered chain or the taxpayer partner under Articles 22 or 9-A.12 The proposal does not address the treatment of partnerships that file a composite return on behalf of nonresident partners. The Department notes that the proposed UBT is designed to preserve state and local tax deductibility for New York State residents, but affected partnerships and their partners should consider modeling how the proposed UBT could impact their specific state and local tax posture. Considerations may include: partners that do not receive a UBT credit or nonresident partners that may not be allowed a resident credit in their resident state, in whole or in part; items of income in computing the UBT; and allocation issues. Comments on the discussion draft are due by July 16, 2018, by emailing federal.tax.response.comments@tax.ny.gov. 1 NY Dept. of Taxn. and Fin., Response to Federal Tax Cuts and Jobs Act (May 16, 2018) (last accessed June 1, 2018). 3 IRC Section 702(a)(8) (Income and credits as partner), as applied to the partnership by IRC Section 703 (Partnership computations). 4 This excludes the affected partnership's distributive share of these amounts from a lower-tier partnership, allocated to New York State under NY Tax Law Section 861(b). 5 A lower-tier partnership would be mean a partnership in which an affected partnership has a direct ownership interest. Document ID: 2018-1166 |
