On-Demand: Financial Services Year-End Tax Planning Webinar Series | Part 2
Join EisnerAmper as we review the key year-end tax planning strategies and takeaways. In this webinar, we update and discuss the latest State and Local legislative tax developments, and year-end tax planning for funds.
Denisse Moderski:Thank you, Astrid. Good afternoon, everyone. My name is Denisse, as Astrid mentioned. My colleague, Andrew, and I will be covering some state and local tax topics, which I think are very helpful.
We hope that this can help with year-end planning and also things to take into account for future planning. Here's our agenda. We will start with PTET. We're going to cover a little bit more in detail on New York State, New Jersey, New York City, Connecticut, and California. We'll mention some very general rules and basics in other states, but these are the main ones where we're going to focus a little bit more in detail. We're also going to be talking about telecommuters and nexus issues, which is one area that we have seen happening a lot since COVID. Next, changing domicile and some best practices to follow. And lastly, UBT, any UBT opportunities, tax saving opportunities, issues that we have seen ever since COVID.
So we'll talk about PTET. What is PTET? As I'm sure many people have heard about it or know a little bit about what this is, is since 2017, when President Trump signed the Tax Cuts and Jobs Act, what happened is they imposed a $10,000 limitation for individual taxpayers. And any state and local tax, along with any real estate or local taxes, it was limited to $10,000. Now, that was a very big... It had a negative impact on taxpayers that reside in high-tax jurisdictions, like New York, New Jersey, California, because income taxes alone exceed $10,000. So you can imagine, right, how negative of an impact this had on those taxpayers. So what we've seen is, the first state that came out with this PTET was Connecticut, in 2018, making a mandatory PTET, which is an entity level tax imposed on partnerships, LLCs treated as partnerships and S Corporations. With TCJA and this limitation, right, we have seen that other states also open opportunities to other states, and we have about 31 states now with a PTET.
Andrew Cohen:And there's two states who are enacting statutes, hopefully, in the future.
Denisse Moderski:Right. And we'll cover some difference on each of one, but the main thing to know is that the PTET varies on a state-by-state basis. The rules are different, so it is hard to say that one rule for one state would've applied to another. So that's very important to know from a planning standpoint because you want to know what are the key differences, what are the qualifications, who's eligible. And we'll cover some of that information. So here's a map with all the states that have a PTET in place. All the blue states, indicate there is one available. And I think this is updated as of August 31st, but we have 31 now, with two pending legislations, which is Pennsylvania and Iowa. And we'll start talking about New York State.
New York State PTET, this came out in 2021. The way it works with New York State is, it's an annual election, it's optional. So, if an entity wants to make an election, let's say, in 2022, but they don't want to make it in 2023, that's fine, because it's an annual election. Once you make the election, it's irrevocable for that particular year. The due date for this election is March 15 of the year. It's three months after the beginning of the taxable year. So, for example, for 2023 tax year, the election is due March 15, 2023.
In 2022, there was an extension because New York State passed some amendments to their law. So, they actually extended the due date through September 15, but that only applied to 2022. So 2023 and forward, the election remains to be March 15, unless further legislation comes out that provides an extension. The way it works with New York State, it's who's deemed eligible, it's a partnership, LLCs, and S corporations, and they must have a filing obligation in New York. Now, it could be a residency filing or it could be a state source filing, but as long as they file in New York.
Who's entitled to get this credit? Now, those are going to be your individual investors, any state trusts, grantor trusts that are owned by an individual, those are deemed the eligible investors that can get this credit. The way it works with the credit is, once you make the election, once you separate the pool of eligible investors, which are your individuals, any Article 22 taxpayers, is you further break it into two pools, right? They have a resident pool and a nonresident. So for any individuals that are New York residents, they will get a credit on 100% of their income, versus any nonresidents that only will get a credit based on their New York source. So, for an example, if we have a partnership with a 50% of their income sourced to New York, the individual partners would get a credit on 100% of their income, versus the nonresidents that'll only be eligible to get a credit on 50% of their income because that's their New York source.
Andrew Cohen:And there's no part-year taxpayers, so to be considered a resident of New York State, the partner, member, or shareholder must be a New York State resident for at least six months out of the year.
Denisse Moderski:Yeah, that is correct. Yeah, so there's no such thing... For example, if you have an individual taxpayer that is a resident for half the year, they may file a part-year residency return with New York State, but that does not apply to a PTET. It's either you're a resident or you're a nonresident, and you calculate your credit based off that. Here's the next slide. We're going to talk about estimates. New York does require quarterly estimates, and the due dates are March 15, June 15, September 15, and December 15. So we do have the Q4 payment for 2022 coming up on December 15.
Couple other things is there is a safe harbor rule for estimates. You pay 25% of the lesser, 25% of the installment, and it's based on 90% of your current projected income or 100% of the prior year. Now, 100% of the prior year only applies if you actually had a PTET election in place in the prior year. So, for example, if 2022 is the initial year where the taxpayer wants to make an election, the 100% of prior year safe harbor rule would not apply. It would need to be 90% of your current projected income in '22. Other thing to know is that New York changed their laws. As of August 31st, of 2022, annualization method, it's no longer applicable, so taxpayers will have to make payments in four installments throughout the year.
Andrew Cohen:New Jersey, actually, is similar to New York in estimates, but their fourth quarter is due on January 15th. And they do allow for annualization in New Jersey, compared to New York. Estimates are made electronically, and one thing about the estimates in New Jersey is that you have to make your election first before you make a payment. So you're going to have to make your election either way, just to get your estimated tax payments in first.
Denisse Moderski:And we'll talk more in detail with New Jersey. We have a section particular assigned to that area, but we just wanted to show a comparison of how the due dates changed. Just to my point earlier, that the state rules for PTET varies on a state-by-state basis. You can see by it dates, all the due dates are different, annualization methods are different and whatnot. One more thing with New York State is the credit that taxpayers will get. For any individual taxpayers, if the entity made a PTET election and they're getting a credit, when they make their quarterly payments, they can factor that in, they can take that credit. So you wouldn't have a cash flow issue, right? For example, you have an individual taxpayer making their quarterly estimates, and then the entity making their payment. Starting 2022, New York allows for individual taxpayers to, when they're doing their quarterly estimates, to factor in this credit coming from the partnership or S corp.
Further into the PTET, we also have New York City that came out with their own version of the PTET. They passed this this year and made it retroactive to 2022. So, due date for New York City PTET election is very similar to New York. It's due March 15. But for 2022 tax year only, the election can be made by March 15 of '23. And one of the caveats for that is that you have to have a New York State PTET election made by September 15, 2022. So, let's say if a taxpayer did not make a New York State election for 2022, you will not be able to make an election for New York City, unfortunately.
Starting 2023 and forward, the PTET election is due March 15 of that same year. It is the 15th day of the third month, after beginning of your tax year. So this is going to be very different from other states, and we'll cover that section later, because New York State and New York City have the due date being same tax year. For eligibility for New York City, there are two criteria. If it's a partnership, you have to have at least one New York City resident member. If it's an S Corp, all members must be New York City residents. So this is a little different in New York State. One thing I wanted to mention, is for S corps, there are two different buckets, and that was one of the changes in the law we saw this summer, is that for New York State, S corps, if you have residents and nonresident members, your PTET is based on your New York source income. There is no resident/nonresident pool concept like you do in a partnership.
They also have a new category for S corporations that have 100% New York State residents, where you can compute their PTET on all their income. But they must certify that it's an S corp resident at the same time they're making the election. So that's one difference in New York State that you'll see, compared to other states, where they don't have two resident/nonresident S corps. For the most part, in most states, if you have an S corporation, most of the residents are going to get a credit based on their state source amount.
Andrew Cohen:That certification for the New York State S corporations is due on March 15th, 2023.
Denisse Moderski:Correct. It's the same due date as the election, and that can be made online when the election, everything is online through the business account. Same thing for New York City, the election is in the same place as New York State. For anyone who's familiar with the New York State PTET election process, it's in the same website. There's an extra section on their website where you can select for New York City. Now, the city's still updating their website for further guidance, to provide the mechanics of the calculation, some templates, to provide the method of payments, estimated payments. That, we're still monitoring. It hasn't been available yet, but that presumably should be ready by the end of the year. Because one thing, also, I want to mention with the city is that, although estimated payments are not required for New York City PTET in 2022, we do recommend taxpayers to make the election so that they can get a federal deduction in 2022, especially for cash-basis taxpayers.
One more thing with New York City is that for any resident members that are making a quarterly estimate, they should continue to make their quarterly estimates, not taking into account any PTET credit for New York City. And that only applies for 2022 because the law was retroactive to 2022. So for 2023, we do expect that New York City, for any members, city members, they would be able to take into account that PTET credit when making their quarterly estimates.
Other things with New York City, there's a TSB, and New York State has a very good, robust FAQ on their website. They have a lot of questions, a lot of examples, and we do expect New York City to provide some more information that's similar to that, but that's available on their website. You can even do a Google search and it will take you to the New York pass-through entity site on the New York State website, which has a lot of information, useful information. We talked about this, who is eligible, who are included in the New York City PTET. We talked about the due dates and estimated payments. The due dates for estimated payments, this is starting 2023, are similar to New York State. Due dates are March 15, June 15, September 15, and December 15 of the calendar year.
Other things to keep in mind is New York City also has an entity level tax, which is the UBT, the 4% tax rate. Now, if an elected entity is making a PTET election, they are still required to make their UBT payments for any S corps that are subject to the general corporate taxes. They're also required to continue to pay their franchise tax and their taxes subject to General Corporate Tax. For example, if you have a taxpayer, an entity partnership that is paying their UBT, and they're also making a PTET election, those members, some of them will have two credits, right? They will have a UBT credit that they can claim under New York State resident return, plus a PTET credit.
One thing important is for both New York State and New York City is the PTET credit, it's refundable. So while the calculation is at the entity level, and let's say the entity is subject at the highest percent, which is the 10.9 rate, if you have an individual partner that happens to be in a lower tax rate, then any overpayment will be refunded to that individual. Any overpayments made by the entity, that will be refundable to the entity, and the state will issue a check to the entity. There is currently no option to carry forward the overpayment to next year liability. So those are things to know on New York State and New York City. And now we have a polling question, so I'll give everyone a minute to go through this.
Astrid Garcia:Polling question #2.
Denisse Moderski:Thank you, Astrid. That's great. Seems like most people are paying attention.
Andrew Cohen:Yes. That's good.
Denisse Moderski:They got the right... well, the right answer. And I'm going to pass it now on to my colleague, Andrew, so he can cover other states' PTET, so everyone can see the differences.
Andrew Cohen:Before I go to New Jersey, I want mention one thing about New York State is that, at the deadline for the due date of return, September, New York State changed their rules regarding how they handle their calculation of the PTET tax. Prior to the change, you were not supposed to add back any credits for pass-through entity taxes paid from New York State or other states. But as New York State does sometimes, they changed the rule at the last minute to say now you do add it back. So that affects your estimates for fourth quarter. The first three quarters, you're paying on a lower taxable income because you didn't add back the credits from taxes paid to other states and New York State. So now, when you have a fourth quarter payment, you're going to have to do a catch-up payment, possibly, because now you have a higher liability for fourth quarter with the add backs.
So New Jersey is the Business Alternative Income Tax, is the BAIT. And there was some reform to the BAIT in 2022 I want to go over. When it first was enacted in 2021, the BAIT was on only New Jersey sourced income, which was limiting. So New Jersey revised that and made it similar to New York. So now, for New Jersey resident partners all the income and guaranteed payments of those resident partners will be subject to the tax. And for New Jersey nonresidents, partnerships, you're going to have New Jersey sourced income. S corporation is still going to be based on New Jersey sourced income. So the difference between partnerships and S corporations is right there to be aware of.
For nonresident withholding, 2021, you're required to do both nonresident withholding and also make the estimated PTET payments. But for 2022 and after, New Jersey changed that, and now, if your New Jersey BAIT payments cover the liabilities of the partners and shareholders and members, then there's no nonresident withholding. The outliers will be the higher taxpayers, like corporate partners might have a higher tax rate than, say, individual taxpayer. In that situation you would have nonresident withholding. So you do still have to determine who your partners are, members are, and determine the tax rates for each one to see if the BAIT payments cover the taxes for those individuals. If not, you may have to do nonresident withholding.
There's also a change in the tax rates. There's now only three tax rates for New Jersey BAIT, and the highest one now is very quick. It's at a million dollars, it's at 10.9%. And if you compare that to New York State, for $2 million in New York State, it's only 6.85%. So tax rate now in New Jersey are much higher than New York State at this point. Another change in the New Jersey BAIT was the sourcing of receipts and the apportionment formula. For 2022, both the partnerships and the S corporations must use the partnership sourcing rules. Sourcing rules for partnerships are your cost performance and the three-factor, sales, profit, and payroll, equally weighted. So that's another change you have to be aware of in New Jersey.
Connecticut, we mentioned earlier in the presentation, is the first PTET that was enacted. They're the trailblazers here. There's a mandatory PTET effective January 1st, 2018. And it applies to anybody who does business in Connecticut or has Connecticut sourced income. And it doesn't apply to sole proprietors or disregarded entities. The tax rate is 6.99%, and there's two ways of calculating the Connecticut estimated tax. You got the default method, which is standard base method, which is based on the Connecticut sourced income. Then you have the alternative base method, which you have to make an election for on the return. And that's for when you have a Connecticut resident partner and you have unsourced income. That's where that comes into play. Unsourced income is income that's not sourced in any state. In that situation, the resident partner might want to make the election to get the benefit of the unsourced income.
The difference between Connecticut's mandatory PTET is that there's a limitation on the credit. It's limited to only 87.5%. Where New York, New Jersey, it's 100%. So it's a little bit of a haircut for Connecticut on your credit there. Same thing with Massachusetts. Massachusetts is 90%, so that's another state you have to be aware of that's limited, Massachusetts as well. Also, estimates for Connecticut are similar to the calculation for New York and New Jersey. It's going to be based on 100% of the prior year tax, 90% of the current year's tax. The due date for the fourth quarter is January 15th, so there's no due date for December for Connecticut. And you pay estimates if there's $1,000 or greater in tax liability for that year.
We move on to California now. California's a little bit different than the other states, in that they have some different rules in terms of elections and for refunds. Now, for the elections, not every single partner, member, shareholder has to elect into the California pass-through entity tax. And this is beneficial in a situation where you might have a situation where... You calculate the California PTET based similar to New York, in that for California resident members and partners and shareholders, it's based on all the income of those individuals and guaranteed payments. And also, for the nonresidents, it's based on California sourced income. So if you have a situation where you have no California sourced income and you have nonresident partners, you might want to have those partners not elect into the California pass-through entity tax because they will not get a benefit because there's no California sourced income, so there won't be any income or benefit to them.
So then, in that case, the resident partners can elect in, and you can do it that way as well. So that's just a difference between California. Although not every single body has to elect in, it's still binding on all the partners and shareholders, even though you may not be electing into it. So it's also a consideration as well there. The tax rate for California is 9.3%, which is a pretty decent, high rate. And once you make the election, it's irrevocable and, as I said, binding on all consenting members. Qualifying for the California PTET, you have individuals, trusts, and estates, and disregard entities that are owned by individual trusts and estates. So a corporate partner or a partnership partner does not qualify as an investor or who can get a benefit the credit. Also, disregard entities if they're owned by a corporation or partnership, also do not qualify.
And one thing that's very important here is that if you have a combined group, if you have any combined group or happen to be part of any combined group, you cannot elect into the California pass-through entity tax. Elections are made on an original timely form, but there is one key thing about California that we want to point out that's very important here. There's a special rule in California that you must, by June 15th, pay in an estimate payment that's either greater of a $1,000 or 50% of the prior year's tax. And if you don't make those payments, you can't make the election.
So, in essence, you're deciding to make the election at that time because you're paying in the money at that time. But be very cautious that if you don't make that payment, then there's no exceptions to that. We've had situations where clients do not make those payment, and they couldn't make the election. And they call up California to say they didn't make the payments. They say, "You're kind of out of luck." So you need to make this payment by June 15th. And this is the only required payment for the year. But if you want to get the benefit of more of a deduction, you can pay in payments September and December if you want to. And the actual due date for the final payment is due March 15th, 2023 for '22 tax year.
Denisse Moderski:And I just want to point out one thing on this for California because, see, the rules are different for an estimated payment, where you have two installments, versus New York State or New Jersey. But, for example, if you have an entity and one of the requirements is 50% of the prior year, that's provided you made an election in the prior year. What happens if we have, let's say, a taxpayer who had a significant transaction, right, for that particular year, let's say it was 2022, and when they're making their 2023 prepayment, they have to make that 50% payment on the prior year.
It doesn't matter if we don't expect to have this transaction in 2023 because that's the requirement. If you don't make enough of the payment, there is a risk that the election cannot be made, that California will not validate that election. So that's very important because we could have a situation where we had, again, on a sale of a business, for example, and then we don't expect that to happen in the future yet. But yet, we are still stuck paying the 50% of the prior year. Once you file your PTET return and you overpaid, you get the money refunded, but it is important that we're paying enough so that we don't lose that PTET election. So that's one thing I wanted to point out.
Andrew Cohen:Right. And also, what happens if you create an entity after June 15th? Can you make the election? And California recently said that you can make the election if a fiscal year is after June 15th and before December 31st. So if you have any entities that were created after June 15th, and you want to take advantage of the California pass-through entity tax, you still can. Just something in consideration there as well. Another change in the California is that their credit is nonrefundable to individual taxpayers, and it is carried forward for up to five years. That's similar to Arizona's rule, also has a five-year carryover. And that's very limiting to actually benefit of the credit because it's nonrefundable.
Also, another problem with the California pass-through entity tax is that the 7% nonresident withholding requirement still applies. So you're paying the nonresident withholding requirement, as well as your PTET. So there could be a cash flow issue there. One benefit, though, is that starting in 2021, individuals can use the credit to go below the minimum tax in California, which is also a benefit there. So what happens if the entity pays more tax than is due? So say they pay $100,000 in estimates and the tax payment is $50,000? Well, recent changes to the law now allows the entity to apply that excess payment to other taxes. But it doesn't apply to partnerships, so you can't use for partnerships. But other taxes besides partnership taxes, you can apply the excess payments to other taxes.
Denisse Moderski:Like LLC fees
Andrew Cohen:LLC fees.
Denisse Moderski:or the nonresident withholding.
Andrew Cohen:Right. So that's important to remember. That's a new change that just came out recently as well.
Denisse Moderski:Other thing with nonresident withholding, a lot of states have a nonresident withholding requirement for partnerships, like California and many states. California is one of them, that you're still required to pay nonresident withholding, in addition to PTET. But the state does have an exemption form for nonresident withholding. If cash flow is an issue, that is an option that taxpayers can plan, or can explore, perhaps filing a nonresident withholding waiver with the state to get approval and only pay for PTET so that we avoid the double payment. So that's one option to consider.
Andrew Cohen:Right. And with the limitation of the credit for carry forward of the nonrefundable credits, there's some negative rules that came about, about how they handle the credits. They changed their ordering rules for 2022. So now the ordering rule will be, first you take care of your nonresident withholding, then you do your resident tax credits, and then last is going to be your pass-through entity tax. So now less of your California pass-through entity tax credits can be used at that situation. So now you have more of a carry forward for five years. Also, when you calculate your other state taxes for residents, you're going to add back to net taxable income payable the credit that reduced the tax. So now that's going be more of credit for the resident credit, so again, you have more carry forward of the PTET. Estimates are paid online, on the FTB website, or you can use a voucher, the FTB 3893. And another change that happened recently was for S corporations. If S corporations have liabilities that exceed $80,000 with PTET, then they're required now to pay electronically, make electronic payments.
Denisse Moderski:Okay. We covered some of the big states, the main states where we have seen a lot of PTET elections, questions. However, there are many other states that also have a PTET, and every state has their own rules. One thing to know though, while New York State, New York City have a 3/15 deadline in the same taxable year to make an election, other states, they let you make an election by the due date of your partnership return or S corp return or extended due date.
However, estimated payments still apply, so states like New Jersey, where before you make an estimated payment, you are required to make an election first. So while the election date's not until March 15 of the subsequent year, you do have to make it earlier so that you can make your estimated payment. So that's one thing to keep in mind. And Massachusetts is another state where you have to make a registration with the MassTaxConnect for PTET before you can make an estimated payment. So just something to keep in mind, that while we may not have a due date, we do have to make estimated payments, right, in order to make our election and not be subject to any underpayment.
Andrew Cohen:And New Jersey has a special rule that allows you to revoke your election before you file your actual PTET return. So you can make an election, make a payment, and decide, "I don't want to do this anymore." And then you can revoke it, as long as it is before they file the New Jersey BAIT Form 100. That's something to keep in mind too, as well, with New Jersey.
Denisse Moderski:Here's the slide on other considerations for PTET and how it varies. This is a PTET. It's an entity level tax that is at a partnership level, at the entity level. It's basically a way to shift the $10,000 limitation from an individual to the entity so that you... It's a work-around mechanism. Some states are different, where they offer a PTET credit to the resident, and you can get that as a refund, a refundable credit or nonrefundable credit. Other states treat it differently, where you exclude that income. So example, like Colorado, if you have an electing entity, the owner, when they file their Colorado return, they wouldn't pick up that income that's already being taxed by the PTET, right? They would exclude that income.
We have states like Wisconsin that has the same mechanism. It can get very complex from a reporting standpoint, how you claim the credit, how it works at the entity versus at the individual level. So these are things to consider. Also, states that have a nonresident withholding, some states, like Illinois, Georgia, South Carolina, if you have an entity that elects into the PTET, they are excluded from making a nonresident withholding. But you have states like California that it doesn't. The withholdings still apply, so you have to do either a waiver or you have to withhold. But things to consider. I'll pass it on to you so you can talk about Illinois.
Andrew Cohen:Yes. Illinois has investment partnership. They can make an election into PTET. And there's a certain case law in the prior year that says that if you make the election as investment partnership, you're not required to pay the replacement tax, which is a good thing. Also, keep in mind that some states will not allow the other state resident for taxes paid credit. For example, Pennsylvania doesn't allow it for partnerships, but it does for S corporations. Indiana disallows the credit. So that means that you can have a situation where a resident partner is paying a pass-through entity tax in another state and not getting a credit for that. So that would not be beneficial to that partner. Also, some states have talked about what happens when you have potential basis issues. Income doesn't flow to the partnership owner in some of these states. Does that impact the outside basis in the PTE? And South Carolina and Wisconsin said no, you'll calculate the basis as if an election wasn't made.
Denisse Moderski:Okay. Now, that's a lot on PTET, and it can get very complex, but we just wanted to point out some high-level items, some areas of complexities and why it requires planning and discussions early on, because it can impact who's eligible. How do we want to optimize the benefits on each state's PTET? But those are the high-level points that we wanted to discuss. Next thing we want to talk about is telecommuter and the impact of personal income taxes, and also on entities, right, on businesses, how does this impact? And we're going to talk about it from an individual standpoint, for residents or employees that are-
Andrew Cohen:Right. When COVID happened, as we know, everybody was working remote. And New York had a tough stance. They stuck with their convenience of the employer rule. What that means is that if I'm working for a New York office, Eisner, I'm working for the New York office of Eisner, and then I move to New Jersey for COVID, I'm still going to be subject to wages in New York, based on the convenience of the employer rule. The only exception is that if you're a bona fide employer office. And the next slide gives you all the qualifications to meet to be a bona fide employer office. You have to make four secondary factors and three out of 10 other factors. And as you see, it's very complicated to establish that you're working from a bona fide employer office.
So the New York rule is still very prevalent in terms of the convenience of the employer rule being applied, and there's no exceptions for COVID there, in New York. This slide is here for you just to look at, the factors that you have to consider. You can work with your employer if you want to see if you can meet some of these factors. Working together with them, maybe you could. But if you meet this test, then you don't have worry about the convenience of the employer rule.
New Jersey had a case called the Telebright Corp case, which basically said that nexus is created when you have an employee in the state, and that applies even if you have a telecommuter. So with that case then, if you have a telecommuter in a state, that can cause you to have nexus for purposes of sales tax, income tax, personal income tax, employment tax obligations. So you want to be aware of where you have people who are telecommuting because that could create nexus for you in those states, and then having a filing requirement, whether or not you have any receipts in that state. But you still might have a filing requirement. There could be a minimum tax as well that you have to consider in some of these states.
Denisse Moderski:And things to think about with telecommuter, it's not just from an income tax standpoint, but there may be other taxes that it can trigger for a taxpayer, right? For example, if you have telecommuters, but you are in a state where they apply a convenience of the employer or it's a permanent role, you may have employer wage withholding requirement with that state. You may have some business, personal, property tax, right? If the company is buying equipment for an employee that's working at home and their main office is home office, there could be other taxes that are not income tax related. So, something to be aware of from that perspective.
Other things to think about with telecommuting is how it can impact your sourcing, right? For entities, service providers especially, how does this impact your apportionment? If you have states where you have rules of where the cost performance is, where the service is provided, or if it's a three-factor apportionment and now you have a physical presence in, let's say, in a state like California or Massachusetts, how does this impact my apportionment now? Am I subject to file an income tax return? Do I have to source of receipt to that state and whatnot? So it's definitely important to keep that in mind and to track those employees that are telecommuters, also to identify whether it's more of a permanent role or is it a temporary role. How much of their involvement is related to the business activities, to the income-producing activities, because it has other impacts, not just for income tax, but there are other non-income tax items that it can trigger nexus.
Andrew Cohen:Don't forget about the unemployment insurance, workers' comp insurance, other obligations, like paid family leave, wages and hour laws. Keep that in mind as well when you... And we have the third polling question now.
Astrid Garcia:Polling question #3.
Andrew Cohen:60%. That's good. That's correct.
Andrew Cohen:Domicile. I've seen a lot of people and clients coming to us, they want to move from New York to Florida, and they want to change their domicile. So I just want to talk a bit about domicile on a high-end level and what you should consider when you're thinking about changing domiciles. First thing is, what is domicile? Domicile is the place you consider to be your permanent home. It's where all your near and dear items are. It's where you spend all your time. You can have many residences, but you only have one domicile. And if you want to change your domicile, you must affirmatively abandon that domicile and land to another place and make it your permanent home. I said the word land because that means like you're landing somewhere else, you're staying there permanently. That's really what you have to do to change your domicile. And it's going to be based on your intent. Is your intent to change domicile?
When you change domicile, is all your items of your home, near and dear, coming with you? Did you change your lifestyle to the new location where you are? Also, how long are you spending in the new place compared to the old place? That's also a consideration. But it's the taxpayers burden to actually prove, with clear and convincing evidence, that you changed your domicile. And the auditors will review everything you do to make sure that you changed your domicile. They're going to ask you for your travel itinerary, your bank statements, your credit card statements, your moving records. Moving records is actually a stickler. We have one client here that changed domicile, and the agent is asking for moving records. And if you don't have the moving records to establish that you moved, then it could be an issue.
So you want to make sure that you keep track of all your documentation that you moved. Some ideas, they could take a photograph of your furniture in your old home, and then take a photograph of your furniture in the new home to show that you actually moved furniture to the new place. When you get to your... For example, Florida, you want to register for the homestead exemption in Florida, you want to change your license to Florida, you want to have all your cultural events, holidays in Florida. So everything that you do when you change domicile, you want to show that you actually changed from New York to Florida. So it's very important to document everything to show that you changed your domicile.
Some states have statutory residency rules, like New York State, and you can have two locations, like a house in New Jersey and a house in New York. And it's got to be a permanent place of abode which you have for a substantially amount of the year. And if you have this situation, and you're in New York for more than 183 days, you're considered to be a statutory resident. And in that situation, then you're paying tax on all your income in New York, and also, you're living elsewhere, you're paying a Jersey tax. So it could be a double taxation there. A permanent place of abode is defined as a dwelling place of a permanent nature. You don't have to own it or lease it, you just have to be living in that permanent place of abode.
It's similar to domicile. You want to really show your days you spent in New York, in this situation, because any minute you spend in New York is a day. So say that you were in New York City for dinner, and you left New York City Saturday, you started Saturday, and you left at 12:01 on Sunday, that's going to be a New York City Day on Sunday because you were in the city for one minute. So you want to make sure you have documentation to show days you were in New York State. And also, you want to do a calendar to show where you were.
Some of the few things to look at for statutory residency is your telephone bills, your charge cards, E-ZPASS, travel records, bank statements, anything that show where you were in a particular day. And one thing that changed in the New York State audit guidelines is that the definition of substantially all changed with the new audit guidelines in December 2021. It was 11 months, but then it changed to 10 months. Why is this important? Because the rule is that a taxpayer must be present in a state for more than 183 days and maintain a permanent place of abode for substantially all of the tax year. So now, with this new change, that's only 10 months, which is a much lower standard than it was for 11 months. And now we have polling question number 4.
Astrid Garcia:Polling question #4.
Andrew Cohen:Thank you. Just one more thing about the statutory residency rule is that it is really important to have your day count. I was on an audit once, on a very large client we had. And we were able to establish 183 days with their calendar, bank statements and/or credit records. And because it was 183 days, that was enough to win the audit. So you really want to be careful when you calculate your day count for the audits.
Denisse Moderski:Thank you, Andrew. We're going to move on to UBT. And just one more point to add to change of domicile and why it's important is we have seen with COVID, especially a lot of the private equity funds, hedge funds, a lot of entities who were partners changed domicile from New York State to Florida or Texas. It is important to make sure that they establish those guidelines or checklists to show that they're not residency because it could be that when you're changing from a resident to nonresident, this also impacts the business apportionment. The city may or state may flag it for an audit, so it is important to have a checklist, gather as much records and establish that that taxpayer is not domicile, is no longer a resident of that particular state.
So to piggyback off that, we're going to talk about UBT. Now, New York City UBT, it's an entity level tax that is imposed on individuals, partnerships, fiduciaries. These are for any entities that is engaged in any trade or business profession or occupation wholly or partially carried on in New York City. Generally, partnerships are not subject to income tax, but New York City does have this entity level tax. It's on entities that have a gross income exceeding $95,000, and the tax rate is 4%. It's a tax on apportioned or allocated New York City sourced income. For starting tax year 2017 and forward, for New York City UBT purposes, taxpayers apply a single sales apportionment factor. And the sourcing rules for partnerships are different than C corporations, where you apply cost of performance.
And I think this is very important because New York State, even we talked about New York State and the convenience of the employer rule, that you may have telecommuters working outside of New York State, but NY still the principle office or they're still linked to New York State as their home office. That will still trigger the payroll to be in New York State or sources, receipts might be sourced to New York State. New York City is different because it requires you to physically perform the service in New York City. So while we may have New York State residents, as long as they're not in New York City physically performing a service, there is a position the taxpayers may take that and allocate the source, the income, outside of New York City.
We have seen a technical memorandum and a reasonable method where taxpayers apply a number of day count in New York City. And I think this is important for year end tax planning opportunities and savings on UBT taxes. So it is recommended that taxpayers track all of the time spent by their employees, partners, and administrative role in New York City, whether they have a checklist, such as an app or a questionnaire or even time entries or a badge system that can log all the entries while working in New York City. In addition to an office in New York City, it is important to know, for any New York City residents that are performing services for a company out of their home and they are located in New York City, that would still be considered New York City receipts. So that's important to keep in mind. And here's the regulation. I'm not going to go into detail, but it's just to highlight what it says, is you source to New York City based on where the service is performed.
For S corporations, it's different, wherein they do follow a GCT rule, which is a General Corporate Tax, but sourcing, it's still based on a service, where the services are performed. It's a single sales factor, which differs from New York State. They follow the corporate rules, which is single sales factor as well, but it's based on where your customers are located. So that's one thing to keep in mind, the difference between New York City and New York State. Even though it's for the same entity and time, there are two different rules that apply.
I think I mentioned this, about the focus on analysis and UBT. How we've seen this as a big area is because we have historically, prior to COVID, we had entities, especially hedge funds, private equity, assets management, generally sourcing 100% of their income to UBT, to New York City. Now, with COVID, we have seen a shift from 100%, let's say 40, 50, whatever the case may be, but there has been a change. Generally, that creates a red flag from a standpoint because they look at it, well, what caused the big change, right? But we have seen in many audits, they do pursue. The city may come out and question, so it's important that, for the record keeping and also the burden of proofing on the taxpayer, is that we are tracking all this time and all the employees and the number of days and where all the services are being performed. And here's a list of documentation I mentioned that are useful. It's helpful to sustain that position.
Andrew Cohen:And currently, New York City hasn't really said anything about whether they're going to allow this change in receipts because of COVID. So there's no guidance yet, that I've seen, on this, so there's still an opportunity now to do that. This applies a lot to law firms who have lawyers who are working outside the city now. They can move to Westchester or Long Island. So it's a big opportunity for law firms, other businesses that might have situations where they have their employees working outside the city.
Denisse Moderski:And that's pretty much everything. I know it's a lot of information, but we just want to highlight the main things, the big areas that we have seen a lot of movement. It requires a lot of planning for PTET, nexus issues with telecommuters, other non-income tax areas that we have seen states sending notices. And just wanted to be proactive, make sure that we're tracking all this information. If we need to do some planning, restructuring on how we can get some saving, let's say New York City, for UBT purposes. This is a good time to start having those conversations now, start talking to your tax providers, having those conversations with the partners, and especially with PTET because it's a good opportunity to make sure that we get these elections. It is really a good benefit, federal benefit. I mean, that's the main point of this PTET, right, is to get the federal benefit. And you also have other benefits to their residents in other states, minus some that make it more restrictive, but more often than not, we see a big opportunity, big benefits from this PTET.
Andrew Cohen:And also, domicile changes, you want to make sure you track your changes. Use your credit card receipts, keep your emails to show that you've moved somewhere or... because I know, in our experience, we see a lot of residency audits, where they audit you and you have to establish your day count and the fact that you moved and that you actually changed your domicile. So it's important now, within the year, to gather your documents if you changed residency or domicile to keep track of it now.
Denisse Moderski:Yes, absolutely. Thank you. And that is all we have for today.
Astrid Garcia:Denisse, Andrew, we've gotten a couple of questions from the audience. Do you want to go over some of them during this time?
Denisse Moderski:Sure. Okay. Let me see. It's weird, it didn't pop up before. Okay. Okay. So here, I'll go through the core question. "Did you say you cannot elect New York City PTET for 2022 by March 15, 2023 unless you elected New York State PTET by 9/15/2022? Correct. So one of the question was whether you can make a New York City PTET election by March 15, if you didn't make one for New York State. That's correct. So for 2022 tax year, if you did not make a PTET election for New York State by September 15, then yes, you will not qualify to make a PTET for New York City. You will have to make one for 2023. And technically, in New York State PTET election for 2023. You also have your New York City, plus any quarterly estimates you want for both entities, for both jurisdictions, I should say.
Okay, so another question we have is, "A lawyer represents clients in New York City for... but advises clients on Long Island..." So this is one of the things I mentioned, right? It depends on what we're talking about. For New York City purposes, if we're talking about partnership or an S corporation, it's source based on where the performance is taking place. So if you have a lawyer in Long Island, that would not be considered New York City. Now, if we're talking about at C corporation, right, you will source it based on where your customer is located. If your customer is in London, I mean, that would still be outside of New York City. Now, if you have, let's say, this lawyer working from the home in New York City and the client is in Canada, that performance is still happening in New York City. For UBT purposes, that would still be considered New York City receipts. That was a good question. Do you want to answer one of the questions?
Andrew Cohen:Let's see.
Denisse Moderski:"We have an investment advisor firm that..." We have a question from Jennifer Pento.
Andrew Cohen:"An investment advisor firm based out of Florida has an employee working from home in New Jersey. Must the income be apportioned in New Jersey, based on the cost of performance three factor." So New Jersey for partnerships, that is based off of cost of performance. So it's really going to depend on what kind of entity you have here. With a partnership, then you would use cost of performance. And since you have a New Jersey employee working there, then you have the cost being allocated to New Jersey. But it's an S corporation, they use market-based sourcing, so-
Denisse Moderski:Which is where your customer will be located.
Andrew Cohen:Right. So it might be a different answer. So it's all going to depend on what kind of entity you have and the sourcing rules in New Jersey.
Denisse Moderski:And one thing to know is that, during COVID, a lot of states had exemptions from the nexus standpoint, that if you had telecommuters working in their state, it would not trigger nexus to the taxpayer. However, as of 2021, many states lifted that exemption. So if this was applicable to October of 2021, if you have an employee working from home in New Jersey, yes, it would trigger nexus. And because it's a three-factor or partnership, you would have some receipts sourced to New Jersey. You would allocate it based on the time spent by this individual working from home. And obviously, you have a payroll factor possibly. So that answers that.
Andrew Cohen:And we're going to get an email of these questions, so we'll send you guys an email of... You can get your answers now, but we can send an email response to your questions.
Denisse Moderski:Yeah, because I believe we only have one minute.
Andrew Cohen:One minute left.
Denisse Moderski:Yes. So I'm going to just cover one more thing. One of the questions was, "What's the difference between New York City and California UBT?" Well, New York City has a UBT, which is the entity level tax on gross business income, trade or business income. California has an LLC fee, which is also an entity level tax, but that is a fee that applies to entities that have income source attributable to California. That answers the question.
"Is the character of the PTET expense the same as the character of the income, for example, if the partnership is an investment partnership, would the PTE expense for federal purposes be below the line. That is a federal question, so I will hold off on that one because it's from a state perspective, whether it's an investment partnership or trade or business income. I mean, is that for New York purposes? It doesn't disqualify you from making an election. Now, how to make qualify or how to classify the deduction from the federal perspective whether it's a line one or line 13, that really depends. I mean, that's more of a federal implication than a state. And I think we are on time, but to Andrew's point, we will get a list of questions, and we'll provide you answers accordingly. Thank you, everybody.
Andrew Cohen:Thank you for attending.
Transcribed by Rev.com
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