2023 State and Local Tax Considerations
As we welcome in 2023, there are several state and local tax topics that need to be considered. An EisnerAmper webcast titled Financial Services Year-End Tax Planning Webinar Series - Part 2 discussed a handful of considerations including: 1) the state pass-through entity tax (PTET); 2) telecommuting; 3) changing domicile; and 4) sourcing of service revenue for purposes of the New York City Unincorporated Business Tax.
New York State PTET:
- The election is annual and was irrevocable through the 2022 tax year. In 2023, a taxpayer can revoke an election at any time before the election due date. The election due date is March 15 (the 15th day of the third month of the tax year).
- The NY State PTET credit is a refundable credit.
- The NY State PTET tax rates are as follows:
- $2,000,000 of taxable income: 6.85%
- Over $2,000,000 up to $5,000,000: 9.65%
- Over $5,000,000 up to $25,000,000: 10.3%
- Over $25,000,000 of taxable income: 10.9%
- Eligible investors for the NY State PTET credit are those members that are individuals, trusts or estates (Article 22 taxpayers).
- For partnerships, the credit is calculated by including all eligible resident and nonresident members. A NY State resident is defined as an individual who is a resident of NY State for at least six months. For S corporations with resident and nonresident members, the NY State PTET is calculated based on NY-sourced income.
- Beginning in 2022, resident NY State S corporations that certify at the time that the entity made its PTET election that all members were residents of NY State will calculate the NY PTET on all the S corporation’s income. The certification will be made on the taxpayer’s Business Online Service account and is due on March 15, 2023.
- The NY State Business Online Service account has been created by the state as the one location where entities elect to pay the NY State and New York City PTET, make estimated tax payments, and file and pay the New York State and New York City PTET, amongst other things.
- Estimates are due on 15th day of March, June, September, and December. The estimates are equal to 25% of the lesser of 100% of the prior year’s PTET or 90% of the current year’s tax (provided an election was made in the prior year). Otherwise, 90% of the current year is due. As of August 31, 2022, the annualization method for estimate purposes is no longer available.
New York City PTET:
- Effective January 1, 2022, New York City partnerships, limited liability companies (LLCs) and S corporations can make an election to pay the New York City PTET. Note: A NY State PTET election must have been made for tax year 2022 beforehand. The New York City PTET credit is a refundable credit.
- The New York City PTET tax rate is 3.876%.
- An eligible partnership or LLC is an entity with at least one New York City resident partner or member. An eligible S corporation must have only New York City resident shareholders.
- The New York City PTET is applicable only to city resident partners, members, or shareholders. Thus, only income from city resident partners, members or shareholders is used to calculate the New York City PTET.
- For the 2022 tax year, estimates are voluntary and individual partners, members or shareholders must calculate their individual income tax estimates without regard to the NYC PTET credit.
- Finally, making the election to pay the New York City PTET does not exempt a partnership from the New York City Unincorporated Business Tax and an S corporation from the General Corporation Tax.
New Jersey Business Alternative Income Tax:
- Starting in 2022, electing entities can calculate the NJ Business Alternative Income Tax (BAIT) on all the income of resident partners and members and NJ-sourced income for nonresident partners. S corporations still calculate the NJ BAIT using NJ-sourced income. The NJ BAIT credit is a refundable credit.
- If the NJ BAIT is expected to cover all the required estimated income taxes of the nonresident partners, members or shareholders, there is no requirement for nonresident withholding. If the NJ BAIT credit does not cover all the required estimated income taxes, nonresident withholding will be required. For example, corporate partners, members, or shareholders have a higher tax rate than the New Jersey BAIT and different sourcing rules, which could result in nonresident withholding being required to be paid on those partners.
- As a result of revisions to the NJ BAIT for the 2022 tax year, the NJ BAIT tax rates were adjusted with the highest rate now at 10.9% applying to taxable income of $1,000,000 or more.
- Partnerships, limited liability companies and S corporations must use partnership sourcing rules. NJ partnerships use cost of performance for the sourcing of service revenue and use a three-factor apportionment formula, equally weighted.
Connecticut Mandatory PTET:
- Connecticut has a mandatory PTET that applies to partnerships, LLCs and S Corporations that conduct business in Connecticut or have Connecticut-sourced income.
- The tax does not apply to sole proprietors or disregarded entities.
- The Connecticut PTET tax rate is 6.99%.
- Connecticut PTET credit is limited to 87.5%. New Jersey, New York, New York City and New Jersey do not limit the amount of the available credit.
- Estimates are due on 15th day of April, June, September and January of the succeeding year. The estimates are equal to 25% installments. The estimates are based of the lesser on 100% of prior year’s PTET or 90% of the current year’s tax. If the taxpayer did not file a Connecticut PTET in the prior year, the taxpayer will use 90% of the current year’s tax to calculate the estimate.
- California allows for partners, members, or shareholders to opt out of participating in the California PTET.
- The California PTET election is due on the due date of the return, including extensions. Although the election can be made by the extended due date, payment of the PTET is due on March 15.
- When calculating the California PTET taxable income, all the income of a resident member is included in the calculation, and only California-sourced income is used for nonresident members.
- Only partners, members or shareholders who are individuals, trusts or estates can benefit from the California PTET. This includes grantor trusts wholly owned by an individual.
- If an entity is part of a combined group, the entity cannot elect the California PTET.
- California requires electing entities to make an estimated tax payment on June 15. This is the only required California estimated tax payment for the year.
- If the entity fails to make the estimated tax payment on that date, it cannot make the California PTET election. The required June 15 estimated tax payment is the greater of 50% of the prior year PTET or $1,000. There are no exceptions to this rule, other than if the entity is created after June 15 and before December 31. In such a situation, the entity can make the election.
- As a result, if the electing entity makes its election after the June 15 required estimate, it will be making a California PTET estimated tax payment before making the actual election.
- The California PTET is a nonrefundable credit that is carried over for up to five years. Recent changes to the PTET laws in California now allow the entity to apply any excess PTET to other taxes (i.e., $800 annual tax, nonresident withholding, or the LLC fee).
- Additionally, the nonresident withholding requirement still applies even when the entity makes the PTET election. However, an electing entity may choose to file a nonresident withholding waiver with the state.
- California also revised the ordering rules for the application of the PTET credit. The California PTET credit is applied after nonresident withholding and the resident credit for taxes paid.
- California resident individual taxpayers calculate their resident credit for taxes paid to other states; the credit amount that reduced the tax is added back to net taxable income payable.
- If the S corporation has a California PTET liability that exceeds $80,000, the entity is now required to pay the California PTET electronically.
- Having a telecommuter in a state will generally create nexus and may require a return to be filed in that state.
- NY State applies the convenience of the employer rule and may require that NY State wages be withheld from the telecommuter.
- Telecommuting may affect the taxpayer’s apportionment (creating payroll) or sourcing of service revenue (especially if the state uses cost of performance).
- Having a telecommuter may also trigger an employer to have other non-income tax exposure such as payroll, local taxes, etc.
Domicile is the place the taxpayer considers to be his or her permanent home. When changing one’s domicile, the taxpayer must affirmatively abandon his or her domicile and land (or move) to another state and make it his or her new domicile. It is the taxpayer’s burden to establish with clear and convincing evidence the change in domicile. Some actions that can be taken to establish a change in domicile are:
- Documenting that the items near and dear to the taxpayer were moved to the new home.
- Establishing that the taxpayer changed his or her lifestyle to the new location.
- On audit, providing moving records, travel itineraries, bank statements, and credit card statements showing purchases in the new location.
- When moving to Florida, registering for the homestead exemption, and changing driver’s license to Florida.
Under New York Tax law, a statutory resident is a person who is not domiciled in NY State but maintains a “permanent place of abode” in the state for substantially all the year (which is currently ten months) and who spends more than 183 days of the taxable year in the state. For purpose of the greater than 183-day count portion of the statutory residency rule, any part of a day spent in New York is considered a “New York” day (with exceptions such as medical days). A taxpayer who may qualify as a statutory resident should keep complete files of telephone, charge card, EZ Pass, ATM, and travel records and a daily detailed calendar.
If a taxpayer is determined to be a statutory resident and a non-domiciliary of New York, the taxpayer will pay tax in NY State on all his/her income which could lead to the taxpayer paying tax in on the same income in two different states.
New York City Unincorporated Business Tax:
For purposes of sourcing service revenue for New York City partnerships, the city uses cost of performance. When applying cost of performance, the actual services must be performed in the city. This provides an opportunity for businesses that have employees now working outside the city to source some revenue out of the city for purposes of the Unincorporated Business Tax. The employees must be income producing employees rather than back-office personnel. This is a good tax planning opportunity for businesses such as law firms, and other service businesses
Business Tax Quarterly: Q2 2023
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