Year-End Tax Planning Webinars for Funds and GPs | Part III

Therefore, any corporate foreign taxes paid in the local jurisdiction, US investors can flow that through as a foreign tax credit and utilize those on their individual or corporate returns based upon the flow through profits from that limited entity. Losses will also flow through to US investors on a pro rata basis, but you do have to be careful in the local jurisdictions as a lot of countries have now gotten a lot smarter as it pertains to check the box elections that we utilize in the us. So there is this concept of double dipping because when you think about it, a corporate vehicle in a local jurisdiction, if they did derive a loss during the annual year, they would typically be treating that as an NOL and carrying that forward to subsequent years, whereas a US investor could be taking that loss in year one. So there is this double-dipping concept and definitely you should be getting local tax advice as far as that goes whenever you're thinking about checking the box.

For US tax purposes, any dividend payments that are coming out or payments from a foreign disregarded entity from a US tax perspective will be treated as a distribution, not a dividend. So if it's a partnership, it'll be partnership distributions. If it's a foreign disregarded entity, it's just a disregarded payment, whereas in the local jurisdiction it'll be treated as a dividend. So those are some concepts that we tend to look at with hybrid structures. Now a reverse hybrid structure is an entity that is not fiscally transparent for US federal income tax purposes and is treated as a fiscally transparent for foreign tax purposes. So this is going to be an offshore limited partnership, an offshore LP that for US tax purposes we check the box to treat as a corporation. However, for local tax purposes, it'll be treated as a partnership or flow through entity. Some of the reasons we would want to do that is for US income and estate tax purposes, it's treated as a blocker. So for your non-US investors going into a offshore LP that we've checked the box to treat it as a corp. For US tax purposes, this could be helpful. However, for us withholding purposes, it will be treated as a flow through to your non-US investors and we'll get into that in the next slide. Why that's important is because of the treaty network that some of your non-US investors could be coming from and investing into an offshore LP where that could be beneficial.

So if we think about hybrid or reverse hybrid structures and we're thinking about treaty benefits that are flowing through from US source income that could be derived from these structures, we do have to think about 8 94 C. So 8 94 C is there to limit the ability for treaty benefits to apply to hybrid entities. And however, there are regulations under 8 94 that if a taxpayer from a treaty jurisdiction is meets two different scenarios, you could still apply treaty benefits to any US source income that is being derived within that structure. So the first scenario or first step to clear is to make sure that the non-US investor that's investing in an offshore lp, that we've checked the box to be treated as a corporation for US tax purposes, that within that offshore lp, that non-US investor is deriving income annually as it's derived. So they're treating it as a flow through and picking up income annually.

And then the second hurdle to clear is the residency requirement hurdle, which is essentially the tax residency of that non-US investor to be in a treaty jurisdiction. And if you look at a typical Cayman master structure or Cayman master feeder structure where you have the offshore feeder as a Cayman lp, they check the box to be treated as a court for US income and estate tax purposes, but it is still transparent for us withholding purposes. This is where you would potentially get treaty benefits flowing through from any US source income that the offshore feeder is allocated. So we put together a quick example of how this would work. So let's just say a Mexican resident, an individual is owning an interest in the Cayman offshore feeder, which is a Cayman op. They derived the US source income from its interest in the master. So the Cayman LP obviously has an interest in the master. Everything is flow through the Cayman LP flows that income through to the non-US or the Mexican resident, that Mexican resident, as long as they are taxed locally on that annual flow through income from the Cayman lp, the Mexican treaty rate should apply to any US source income flowing through that structure. So therefore, for example, any US source dividends, we would apply the Mexican treaty rate as long as we have the W eight forms on file, et cetera, that confirms that the Mexican treaty rate would apply for that specific example in that individual.

So US Source income in general is taxed on a gross basis at 30%. As I just stated, W eights are very key into obtaining the information that you will need in order to potentially apply treaty benefits. The W eight series is different for the type of investors. So for individuals you would get W eight Bens entities W eight benes, if it's from a foreign government W eight EXPs, and if it's from a foreign flow through entity such as a foreign partnership, you would get W eight I Ys. And then you would also need to get the partnership allocations for that foreign flow through and then either WA Bens or WA Benny's for the partners of that entity. So very key on that point because I see that missed sometimes the payer of the US source income still needs to do their due diligence and does have the responsibility to determine whether these forms are reliable and accurate before they do apply treaty benefits if those facts and circumstances are there. And then also in a lot of cases now every treaty will have a limitation of benefits article within the WA forms, specifically the WA Benny form. There is a limitation of benefits section. You want to make sure that the right boxes are ticked. The tax residency country is legitimate and they do meet the limitation of benefits articles so that they can obtain treaty benefits, which is found in most treaties that we have with various countries.

Irina Kimelfeld:Once we, in example, sorry, in your example where you had the check the box offshore feeder, right, that check the box to be a corp, but you're saying it's a flow through, right? What's the form that it would give to its withholding agent?

Stephen Christiano:So the forms would be the WA forms that for the ultimate investors of the offshore lp. So you can look through for US withholding purposes, even though we're treating it as a corp for income tax purposes and estate tax purposes. But for us withholding, you want to give the W eight IMY for the offshore feeder lp and as I was just stating with the schedule of the allocations for withholding purposes and then the investors, the ultimate investors that are coming from various jurisdictions, their wa, Bens or wa Bess, et cetera,

Irina Kimelfeld:Right? And it's important to keep that form updated right as the investors potentially change with the withholding agents.

Stephen Christiano:Definitely, definitely the WA forms are valid for three years, but if there is a change, those forms do have to be updated and supplied to the US withholding agent.

So then we get to reporting and we're just going to go quickly over 10 42 reporting and obligations under chapter three and four of the various withholding regimes that we do have in the us. And chapter three withholding is going to be your fiap income. So generally withholding is charged at the highest rate. It's 30%, it's governed under section 1441 and 1442, and that 30% withholding tax can be reduced if you have a valid W eight form that has a resident of a tax treaty jurisdiction. Chapter four was in specifically for FCA purposes and that withholding is also at a 30% rate. Now if you're registered with FCA and have been doing all the proper reporting and that is signified on the WA forms, then there shouldn't be any additional withholding that applies for FCA purposes. But that is another withholding regime that you have to be aware of and all of this reporting gets done on the 10 42 s, which we'll go into sometime soon. The other partnership withholding that we have to be concerned about with non-US investors, and we're not really going to get into the details during this session, but is ECI withholding ECI is going to come up in whenever you have investments in US trader businesses that could derive effectively connected income.

Those allocations of that income would be treated as ECI to non-US investors and could be subject to withholding or will be subject to withholding at the US partnership level, which is done at graduated rates for individuals, for non-US individuals, that would be done on ordinary income at 37% capital gains at 20% for non-US corps, whether it's ordinary income or capital gains, it's going to be done at the corporate rate at 21%. All of this is governed under 1446. You also have, if you're investing in US real estate, ferta implications, et cetera, which would be a different withholding regime and just to be aware of that as well as another withholding consequence of investing in US real estate.

So what is FAP income? There's various types of FAP income. I think the most common examples you're going to see is US source interest income, US source dividends. You do have US source dividend equivalents, OID royalties and rents for rents. Typically what we would see in industry standards is that rental income is going to be treated as ECI, whereby the non-US investors will be making net ECI elections, which you should get at W eight ECI form from your non-US investors so that they stipulate they will be treating any sort of rental income that passes through as ECI. That will be a better tax answer for a non-US person because otherwise rental income is subject to gross withholding at 30%. Whereas if you treat rental income as ECI, it's done on a net basis and therefore you can take deductions. But typically in fund structures, these are the common examples that we're going to see and that will have to be reported on a yearly basis to your non-US investors.

So for 10 42 reporting, there are two different methodologies out there that you can utilize. Generally for partnerships that we see in the fund to fund industry, you typically are going to go on the lag method of reporting. The lag method of reporting is a common methodology so that your 10 42 s withholding lines up with when you actually receive the K ones. Now there is a lag because typically what will happen is that your 2023 K ones will not be issued until sometime later in 2024, typically in September. And the income that the underlying partnership has derived will not be known until they actually receive the underlying K ones. So obviously there's an issue between what US source income there is versus what is actually needed to be deposited with the IRS from a US withholding standpoint. And the reason the lag method is popular is because this essentially lines up the deposit requirements that you need to abide by for us withholding purposes when you actually get the K one so that there's no deposit penalties issued.

The issue with the lag method is that when you do the withholding in the subsequent year, even though it's for 2023 income, so for example 2023 K ones were issued in 2024, possibly September 15th, you've now calculated what your US withholding should have been for 2023 purposes, but you're making that payment in 24. That 2024 payment will be reported on a 2024 1042, which is not due until March 15th, 2025. Hence the lag method and the 1042 Ss for that specific payment will also be issued in March of 2025. So therefore the 2023 K one will not necessarily match up, but the 2023 1042 west that was issued because the 2023 K one will be represented for US source income purposes on a 2024 1042 s. So there's a little bit of a mismatch there between the K ones issued and when the 1042 is issued, which is why it's called the lag method. But this, the lag method does assist US partnerships or US withholding agents in the fact that their deposits will line up with when the 1042’s are being reported and they won't be subject to any failure to deposit penalties, which we'll go over in a little bit.

Now, there were proposed regs that had not been finalized and these regs, actually, I was surprised to see that these regs go back to December of 2018, and this was the government's attempt to modify the lag method so that everything was being reported in the same year. So essentially in my example, the 2023 K one, whatever US source income for non-US investors is being derived on the 2023 K one that they receive is also being reported on a 2023, 1042 and 1042 s. These are proposed regs, taxpayers can utilize the proposed regs. These were never finalized, so the lag method is still available. The proposed regs allow a US withholding agent to essentially extend the payment of withholding tax in a subsequent year to the extension date of September 15th so that it's within the same tax period. So the issue always was that 1042’s, the actual 1042 return allows for a six month extension, but the 1042 west does not.

It allows for a one month extension. So everything that for 1042 purposes is due on March 15th. And always the issue was trying to get those 1042 Ss done by March 15th or a month after the proposed regs allow you to extend the filing of the 1042 s to September 15th, which then would allow for all of your US source income calculations to be completed once you deliver the 2023 K ones. And then you can also deliver at the same time the 2023 1042’s and make any sort of withholding payments at that time. Now, the issue that I've seen with the proposed regs is that the IRS systems are not up to date even though it is allowable to go on the proposed reg methodology for US source withholding, but I've seen taxpayers getting notices for utilizing the proposed regs because the IRS systems are not up to date. So there is some administrative work in responding to notices to let the IRS know that you are using the proposed regulations for US withholding purposes. So just be aware of that because I have seen that occur with various clients.

Astrid Garcia: Poll #2

Irina Kimelfeld:So just as a reminder, right, the withholding itself, so if there is withholdable payment, you would need now to, if you're matching it to your K one distribution, whenever the K one is distributed to the investors, that's what starts the period for actually making and depositing any withholding payment that's due that distribution of the K one is deemed to be distribution, right? I think we have taxpayers, we have clients who, I mean it's a very short period for the deposit. So I think we have clients who potentially miss that window to make the payment and that's probably part of the reason there's notices.

Stephen Christiano:Exactly. And then that's also where the lag method I think is helpful to allow, allow partnerships or us withholding agents to ensure that the calculation is correct, but also that they're meeting these strict deposit requirements that the IRS has put out. Right.

Oh, and look at that great segue to the timing of withholding tax withholding agents.

Irina Kimelfeld:Almost like I had a slide in advance.

Stephen Christiano:I think so. So as we discussed, withholding is definitely applied on the gross amount of income, whether that's US interest income or dividends, et cetera. And the deposit requirements are very strict. So if you have withholding tax of greater than $2,000 within a given year, you have to deposit that tax through the E-F-T-P-S system within three business days after the end of a quarter monthly period. And that period is determined as of the seventh, the 15th, 22nd, and last day of each month. So in the example where K ones are issued on September 15th, and let's just say September 15th is a Monday, you have to deliver the tax, you have to pay the withholding tax within three business days of the 15th. So essentially by September 18th. And it's really, really important because as we'll go into the next slide, the penalties for not depositing on a timely basis are pretty significant.

So again, the proper forms, and I think we've gone over this in a couple slides earlier, but each year when you do have withholding tax or reportable payments for that purposes, even if you don't have withholding such as portfolio interest, for example, you still technically have to file a 1042 and a 1042's each year. Now 1042’s can be e-filed, 1042 Ss could be e-filed. They've pretty much been e-filed for a few years. Now the 1042 itself typically was a paper file filed form, but last year was the first year that we could actually e-file the 1042, which was great. So it does make the compliance process a little bit smoother and streamline, so you can e-file those forms. Those are due by March 15th each year. As I stated, the 1042 return can be extended for six months until September 15th. And whereas the 1042's is not a six month extension, unless you're going to utilize the proposed regs and penalties, and this is really where the lag method or the proposed regs, the deposit requirements, you really, really need to stay up to date with because the failure to deposit penalty is 10% where the failure is more than 15 days.

And that could be a significant amount if you're talking about us withholding in the millions of dollars, that could be a significant penalty that we want to try to avoid. That's why I think the lag method is popular and continues to be popular in the industry. That's really the main penalty. There are other penalties and interest that could apply if you don't file the 1042’s on time or pay the tax by the due dates of those returns. But I think the biggest one that I've come across is the failure to deposit penalty, which could be substantial. There are other penalties because keep in mind the 1042 and 1042 s are two separate filings. They don't go together. So there are penalties for the 1042 return itself, and there could also be penalties for the 1042 west if those are not filed by the required filing date.

And they ratchet up based upon when the 1042’s do eventually get filed. And this is on a per form basis for 1042’s purposes. So again, the penalties, the interests could all add up if you're not filing the rules. We're here to advise clients and make sure that there, they're making those deposits on time and filing the forms, and we can obviously assist with all of that. And our teams between the international team and the financial services team, we work closely together in order to make sure all of our clients are up to date and doing things properly. And we can review treaty benefits, we can review WA forms and advise clients appropriately on their structures. Hopefully that was helpful, but now we're going to turn it over to our state and local team to talk about some trending topics that are going on within the states.

Josh Thomas:Alright, thank you Steve. Good Friday afternoon everybody. My name's Josh Thomas. I am a manager in the state and local tax group here at Eisner, and we do have a few important topics that you can see on the screen here to get through today. A few ongoing issues that are always important for state and local considerations, as well as a few updates, litigation cases, a few tax updates that some states have made that'll be very important to consider going forward, particularly the upcoming sunset, planned sunset at least of the salt cap limitations related to the optional pass through entity taxes that most states at this point offer.

So the first topic that we're going to be going into is this concept of income producing activity. This is a really critical issue to understand as far as the application to how states source receipts from the performance of services. So historically, states have two primary sourcing methods that they use. One that's becoming more and more common is market-based sourcing. So that's going to be where receipts are assigned to the location where the customer receives the benefit of the service. And then the other option is the cost of performance method, which allocates receipts based on where the taxpayers, the company performing the services actually incurs costs related to the performance of those services. So wherever the labor or the cost to operate, maybe any equipment that's required for performing those services, the receipts are generally sourced to where those costs are incurred. So the statutory language typically leans one way or the other, although tax departments in courts often interpret those rules very differently despite what it seems like the plain language of the statute is.

So that oftentimes creates confusion and inconsistencies for businesses operating in those states. So recent court cases, states like Florida, New Jersey, Pennsylvania, South Carolina, reveal how some of these states are navigating those complexities, sometimes reinforcing cost of performance if that's what the statute says or favoring taking a break from the statute and favoring a market-based approach. So one example in Florida is the bill Matrix case that occurred in 2023. The statutory language of course, pretty specifically refers to income producing activity determined by the cost of performance. But then upon an audit, the Department of Revenue actually tried to break away from what the statute said, not specifically using market-based sourcing, but basically arguing that the income producing activity for that company occurred where the customers were located. So essentially trying to go toward that sourcing method without actually changing the sourcing method. So then of course the taxpayer was not a fan of that method since that would've been not beneficial for them.

They took it to court and the court actually upheld the language of Florida's regulation in that circumstance. So they reinforced the taxpayer's position and upheld the statutory language, but that's not the case everywhere. There was a case in Pennsylvania 2022 with the taxpayer Synthes similar to Florida, the language there is almost identical in referencing the income producing activity under the cost of performance concepts. In this situation, the taxpayer had initially sourced two Pennsylvania based on that method under the statute. Then they later sought a refund by recalculating to a market-based approach. And in this situation, the Department of Revenue actually agreed with the taxpayer and they were preparing to provide them a refund since the market-based approach would've lowered their tax liability. But then the Attorney General actually stepped in and essentially took the Department of Revenue to court leaving the taxpayer out of it essentially.

And then of course, in this situation, the court actually affirmed the Department of Revenue's position in agreement with the taxpayer. So three sides essentially broke from the statute with the attorney general being the only one supporting the statute. So in this situation, they actually broke from that and went toward a market-based sourcing method. So what does this all mean for taxpayers then? Obviously the main one is refund opportunities. So service providers who filed taxes under market-based sourcing in states like Florida might have opportunities to claim refunds by switching to a cost of performance method in alignment with the statutory language there. On the other hand, some of these states where the statutory language still indicates cost of performance and a service provider filed that way, there may be refund opportunities the other direction by switching to a market-based method in response to how some of the courts in states like Pennsylvania or South Carolina have recently ruled in those situations. In the area of risk mitigation, taxpayers can also take this opportunity to lay out procedures for carefully documenting their income producing activities in order to substantiate future sourcing positions under either method. And then in strategic planning, businesses that operate across multiple states can also go into a reassessing of their sourcing methodologies and in order to minimize any risk of double taxation or to find any advantageous positions that they may be able to take.

So the next topic here is New York City has recently instituted some regulatory updates to their corporate business tax, particularly in the purposes of alignment with the state's corporate tax reform. So the effective date of New York City's updates are retroactive back to January 1st, 2015. So that's in alignment with the state's corporate tax reform in the allocation of flow three income from partnerships. Typically New York City would allocate partnership income for corporate partners under its unincorporated business tax or UBT regime, which applies at the entity level for partnerships operating within the city. Under those rules, the partnership itself is taxed on New York City source income and a corporate partner receives credit for its share of the UBT paid by the partnership. But these updates will clarify that the city is aligning with the state and expecting that corporate partners would use the aggregate method, which would treat the corporate partner as directly participating in the partnerships income and activities. So under this method, the corporate partner would have to source its share the partnership's income at its level and apportion it based on its own business activities in the city.

In a deviation from the state's position, the city is opting out of the clear and convincing evidence standard used by the state to rebut presumptions tax regulations. Instead of that, the city is opting to evaluate cases based on their specific facts and circumstances, which is generally seen as a more flexible approach and places less of a burden on taxpayers. Regarding passive investment income allocation, the city plans to align with the state rules for sourcing income from passive investment customers, primarily based on the location of investors, although there is a deviation in the fallback method, if that method is inappropriate, the city is planning 8% flat allocation rate as opposed to the state's method, which is to source based on the location of where the contract is managed. And they're taking a break from this as they see that the contract method is potentially prone to manipulation, where the 8% flat rate is pretty much pretty solid black and white.

The billing address presumption, the city will be adopting the state's billing address safe harbor for sourcing service receipts with one notable modification, which is that businesses must have at least 250 customers purchasing similar services and ensure that no single customer accounts for more than 5% of the total receipts. And then one that is not on the slide here but is very important update to take note of is New York City's changes to the Metropolitan Commuter Transportation Mobility Tax or MCTMT. Those changes will significantly impact limited active limited partners in fund management companies. So previously limited partners were often exempted from the MCTMT under the federal definition of net earnings from self-employment. However, the revised rules under New York City's 20 23 24 budget disqualify individuals from that exemption if they participate actively in the partnerships operations or management, regardless of whether they have limited, whether they're listed as a limited partner or not. The MCTMT rate also rose from point or 2.47% as of July 1st, 2023, and then it increased further to 0.6% for 2024. So all this to say fund managers will definitely need to carefully reassess their MCTMT obligations.

So the next topic here is on the convenience of the employer rule and its application in some recent litigation in the state in York. So this rule generally subjects employee wages to taxation based on where the employer's office is located unless remote work is mandated for the employer's necessity. So essentially if a company has an office in New York, employees are based out of that office, but then say one employee works in Indiana, if that employee's essentially employee's wages are subject to New York tax unless there's some type of necessity or requirement by the employer that that person works in Indiana rather than New York. So some recent cases with the Bryant and Strel cases, they dealt with taxpayers claiming that pandemic related office closures would or should exempt them from New York state income tax under the convenience of the employer rule. But in these cases, the tax authorities ruled that that rule still applied because the evidence didn't show that the employer's necessity required remote work.

Even though they didn't have an office available to go to in the city, technically according to the authority, there was still not a necessity that they work outside of New York. It was still seen as that they were working remotely for their own convenience. The Bryant case also referenced the need to show that the employee worked at least one day in New York for the convenience of the employer rule to apply. This was really emphasized as critical evidence to be able to apply that rule correctly. A central theme in these cases, including the Zelinsky case that is I believe ongoing at the moment. There was an appeal or a hearing on November 21st of this year, just a couple of weeks ago. Central theme in these cases is that the burden of proof is on the taxpayer. The administrative law judge emphasized that to disprove the convenience of the employer rule taxpayers will have to provide clear and convincing evidence that there was a necessity by the employer to require them to work remotely. I believe we have a polling question next.

Astrid Garcia: Poll #3

Irina Kimelfeld:So I think it's notable that New York City does not have convenience of the employer rule, right Josh? As opposed to New York State, even though we definitely have seen some audits in New York City, going back to the pandemic where the auditors have tried to, we've seen clients where their New York City apportionment has dropped, even if New York State didn't necessarily, but for New York City UBT purposes, their New York City apportionment has dropped significantly because somebody was working from New York City and we've seen New York City auditors trying to assert convenience the employer rules in the city where there isn't one.

Josh Thomas:Yeah, yeah, yeah, they'll certainly try if there's an argument to be made for sure

Alright. Yeah. So this was one that I didn't discuss in depth, but there was a case listed on that slide a moment ago that discussed. There was a case just from this year where this, again, another situation where the statutory language was different than what the court ended up ruling, which was in favor of market-based sourcing. And the state has actually released a tax bulletin, I believe in May of this year that confirmed that there was a change back in 2020 that applied to C corporations that went to market-based sourcing and now they've clarified that that applies to partnerships as well beginning January of 2023.

Irina Kimelfeld:And I think that's significant. The market sourcing to New Jersey is significant because New Jersey is one of the states that requires funds to file if there is a New Jersey resident. So they theoretically sort of have a built-in mechanism for knowing where the customers are. You view the LPs as the customers. So if the manager hasn't been filing and New Jersey hasn't been sourcing to New Jersey, they presumably have all the information needed to go after those managers who have the New Jersey based LPs and view those as customers.

Josh Thomas:Right? Right. Okay. So the next topic here is on the Tennessee franchise tax. So despite that, this is a relatively new issue. This slide is already out of date in that the refund period that they opened up is closed. That ended as of December 2nd of this year. So back just this past Monday was the last date to submit any refund claims. So I guess to start off a little bit of an overview, the franchise tax is an entity level tax that is on all entities doing business in Tennessee. So any flow through entities, even single member are subject to this tax if they're disregarded. So this tax is usually based on the higher of in-state property or apportion net worth. But the change that the state made due to some pressure based on claimed unconstitutionality with the commerce clause, they got rid of the in-state property base and have moved to only app portion net worth.

So that opened up refund opportunities for the last four years if any companies paid more franchise tax under the in-state property base as opposed to the net worth base. And then going forward, starting with tax year 2024, that will only be the net worth base. So this will be very beneficial to any companies that do have a lot of investment in property in Tennessee, particularly in companies that carry a lot of debt and potentially have operate with a negative net worth where they end up paying rather than upwards of $50,000 a year. Franchise tax will be going down to the $100 minimum per year. And then the last topic real quick here is on Massachusetts 2024 tax amnesty program, which will provide a limited time opportunity for taxpayers to resolve outstanding tax liabilities with penalty relief. So that program is running right now from November 1st to December 30th.

It's aimed at taxpayers with unpaid taxes, unreported income, unfiled returns, anyone undergoing an audit also can be eligible for appeals for tax periods with returns due on or before December 31st of this year. It covers a wide range of taxes. The ones on the screen, including I believe also sales and use tax and past Humanity withholding and some ineligible taxpayers are those who use the amnesty program in 2015 or 16 and are looking for amnesty for the same tax period. So they can only get amnesty for one tax period one time, or taxpayers seeking to waive penalties on taxes that they already paid or requesting refunds for overpayment. So they have to ensure that the taxes in any associated interest that they want amnesty for are paid by December 31st of this year to benefit from the program's relief. Alright, and now I'm going to be handing it over to Denise to talk about the pass energy tax.

Denisse Moderski:Thank you Josh. Good afternoon everyone, and thank you for being here. I'm going to jump in for the next 10 minutes on some PTT updates and just kind of go over high level where the cell cap limitation stands in some states that have provisions when it's set to expire. So I won't go into all the details, but basically the assault cap limitation, this was imposed back in 2017 when President Trump reformed there was a tax refund under TCJA. So taxpayers that live in high net worth taxpayers that live in high tax jurisdictions like New York, California, they were only able to deduct up to $10,000 of their state and local tax deduction including in real estate taxes. So that was a detrimental impact on the individuals. So many states came out with a pass through entry tax election starting in 2018. Connecticut was actually one of the first states that came out with A PTT, which is mandatory, and now one of the latest changes for PTT is actually Connecticut that now it's made its PTT election optional starting in 2024. So from 2018 to 2024, Connecticut was a mandatory PTA election, while other states are optional, but now it joined the other states. So it's now optional, but it became a mandatory composite state like it used to be before the SOCAP limitation. We have a polling question number four.

Astrid Garcia: Poll #4

Denisse Moderski:Okay, so while we answering this question, I just kind of want to go over a little bit more on the PTT. So the SOCAP limitation is set to expire at the end of 2025. So the taxpayers are still limited to this $10,000 in tax year 2025. So this would be something for going forward from 2026. However, president-elect Trump, there's still conversations whether this SOCAP limitation will be repealed, would it be extended? We don't know yet. So there's still a lot of unknowns whether this is going away, but just so we are all aware, it's that this limitation still in place for 2025. So for year end planning opportunities and also to consider for our tax year 2024 is any elections that are beneficial that it may make sense to do. It's something definitely to have that in by at the time that it's for tax year 2024.

Denisse Moderski:Great. So everyone seems to have gotten the question correctly. So we have 36 states, as I mentioned in New York City that have a pass through entity tax election. Basically it's given an entity like an LLCA partnership or an S corporation, the option to pay these taxes on behalf of their partners. So basically mechanically the way it works is that the individuals that would be limited by the $10,000 at their level, the 10 40 level, they would be able to push that over to the entity so that they get the deduction, the full deduction, which flows to the federal K one to the partners or shareholders.

Denisse Moderski:Here's a chart here, or all the states that have a PTET. So there's a whole lot of states that have enough a PTT election, and just so we all know, it's that every state have their own rules. There's no uniformity across the states when it comes to PTT. So this is a very complex area and really requires a lot of planning and considerations because doesn't make sense to make an repeated election that it's really helpful for run a federal benefit. It sounds like it would be beneficial, but there are situations which we'll cover in the next slide where sometimes PTT may not be optimal.

So here's a list of some pros and cons for where PTT may or may not make sense. So for pros, for example, for M&A transactions. So for example, if an investor has a partnership and they are planning to sell that investment, or if the partnership is going through an F three or selling assets or stock, this could be something that generally will create some significant gain and when the PTT may make sense, right? When you gross up and do that calculation, does it make sense to make a election? There are states that have rules where PA is computer based on residency, which means that all of the income of the partners would've included. There are states that have rules where it's only based on your state source income. So a lot of components and considerations to factor in when you're making a PITA election.

But generally when there's an M&A transaction, whether it's a sell, a partnership interest for all the PEs when they're selling an investment or a portfolio company, this could be something that makes sense to make a pita election. Other reasons why it may also be beneficial because also there are states that have provisions that if you are included in a PITA like Illinois and South Carolina for example, those non-resident members are not required to file a tax return unless they have other sources. But generally they will be covered by the PA election of the elected entity. Also, it's pushing the tax estimates requirement to the entity as opposed to, for example, investors generally will have to make their quarterly estimates if they're New York residents or New Jersey residents by being included in a PT election, they no longer have to make a separate payment because they will be covered by a credit that's being paid by the elected entity.

Also, another reason why may make sense to make a PT election too is that if you have a year where there was a loss and let's say in 2025 there's going to be significant income by making a pizza, you can be covered by the safe harbor rules. For example, New York does not allow taxpayers to use the ANNUALIZATION method for making quarterly estimates. So if let's say in 2023 there was a loss and in 2024 we are expected income, as long as there was an election made in 2023 for New York, you could be covered by safe harbors where penalties could be minimized, interest reduced. So that could be another reason why it also may make sense to do PITA election even when you're expecting a loss, just to have that coverage of safe harbor cons, for example, it's also know your investor pools, right? New York will require all your Article 22 partners to be included in the PTET like your trust and trust your individuals.

If you have a fund or an entity that has it's majorly owned by tax exempt trust doesn't really make sense to make a PE. It may be a situation where it doesn't, right? Because the trusts are not subject to taxing New York and presumably they will still have to be included the PE by the entity and basically file New York to claim a refund. So that may not be something that is optimal to go forward with. Also, it states that this allowed residents tax credit. For example, Pennsylvania. Pennsylvania doesn't have a PTT regime, but they do allow shareholders of S corporations to claim a credit resident credit for PTET. However, partnerships, partners of a partnerships are not allowed to claim a credit for PTT. So that could be something that may or may not make sense. Other situations that are credit limitations, so non-resident, non-refundable credits, California, Utah, if you have an overpayment of an excess PTT credit, that excess is not refunded to the partners.

That has to be carried forward for California for five years. And presumably California is one of the states that requires partnerships to compute non-resident withholding. So if you have an investor that is getting non-resident withholding and they're also getting PTT credit, one of the things to keep in mind is that there is an order rule, like the way how you claim your credit. First you have to use your non-resident withholding and then your PTT. So to the extent you have a significant withholding credit and then you apply the PE and there's an overpayment that overpayment needs to be cared for. So that's something that should be really analyzed and there are ways to plan around for states. For example, when you're dealing with withholding requirements, there are some waivers, available exemptions that partnerships can do in advance so that they're not double paying withholding and also PTT and not ending up with a carryover tax leakage for example.

I have seen this generally with management companies or management companies that are principally conducted in New York State where a hundred percent of their apportionment is New York State. And you also have New Jersey residents, New Jersey, New York, both have the same rule. When you're computing your PTT for your resident individuals, you use all of their income. It's not based on source income. So if you have a New Jersey resident and they are getting a New York PTET credit on a hundred percent of the income that it's New York and they're also making included in New Jersey Bay election, they're going to be taxed on not a hundred percent. So you're basically paying for this New Jersey partner on, you're paying a hundred percent to New York and a hundred percent to New Jersey that could end up in a position where all of the New Jersey or credit will be refunded. So it may not be beneficial.

So this is also something to consider when you're looking into PTT elections and New York and New Jersey's tax rates, it's not much of a difference. So it's something to keep in mind. Here's a list of states that are set to expire, their PTT. This is irrespective of what happens at the federal level with the SOCAP limitations. So California, Colorado, Illinois, at the end of 2025, there will no longer be any PTT elections. Could things change? Could things be amended? Possibly, but right now, 2025, it's the last year of four PTT elections available in the state.

Some changes I mentioned earlier is Connecticut. It's no longer a mandatory PE New Jersey bait credit. This is a change that happened in 2023, but it's no, you now use the corporate rules to compute your PTET credit and Illinois investment Partnerships or anyone for any investment partnerships historically in Illinois they were not required to withhold. Now that is a new requirement for non-resident withholding for investment partnerships and also PTT considerations. So assuming that the so cap limitation goes away, there could be cases where the PTT may still make sense to taxpayers, for example, AMT will come back if a high net worth individual is subject to AMT, a PTET may still be a good beneficial route to go with. And that's all for us. Thank you so much. So everyone for being here, hopefully this was useful information for planning opportunities.

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