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

I think really the goal was to align the regimes as part of the Tax Cuts and Jobs Act with kind congressional intent. And I think unbalanced practitioners have found that it went a long way. To that end, some of the big ticket items were with respect to Gilt and FDI, removing that QBI hurdle. And if you recall QBI as qualified business asset investment, it was essentially a 10% of your fixed assets that went to reduce, it was sort of a floor over which guilty applied. The problem that that had was, or at least some of the issues that arose as part of the CBI was there were foreign tax credit sort of leakages, particularly when you had to deal with 8 61 expense apportionment. So by making these changes, essentially the whole regime has changed. So you'll hear the term neck tie now applied to what used to be guilty because the concept of global intangible low taxed income no longer applies.

So neck tie is really by removing that QBI hurdle. We look at our net CFC tested income, which is again in line with I think what Congress originally intended. The effective tax rate was changed essentially by making the guilty deduction 40% down from 50% and then allowing a 90% indirect foreign tax credit. That effective rate moves to 14%. FDI is now F-D-D-E-I because of that QBI removal. And I think one area of clarification that was a lot of practitioners had opined on was we've now equalized the effective rates for GILT and F-D-D-E-I, excuse me, neck tie and F-D-D-E-I and that I think removes any policy concerns about incentives to shift income offshore. I think very importantly, one of the real favorable items, particularly for our corporate taxpayers is guilty. And the 8 61 regulations have been regulations will be adopted, but the statutes now prevent at least in large parts expense allocation into that guilty basket. So we've already gotten relief on R and D expenses, but now even items like interest expense stewardship, things we're used to seeing as apportionable expenses, those will no longer need to be apportioned into the guilty basket, which is very favorable.

In terms of beat, there was a slight increase from 10% to 10.5%. And one thing that we'll go into detail talking about is the reinstatement of section 9 58 before, which essentially prevents downward attribution for purposes of controlled foreign corporation determination. Another item that I expect we'll hear a lot more about is changes to the pro rata necktie rules and subpart F rules. Before the OBBA, we had essentially a hot potato rule, which is whoever owned CFC shares at the CFCs year end was the entity that picked up that, and that is no longer the case. And so again, we'll see some very detailed regulations we expect in that regard. I think importantly, a number of these changes are not effective until after December 31st, 25. So here in the 25 tax year, we're still under the old regime in a large sense, but it's good to start thinking about these items right now.

And again, a lot of guidance still to come, but one item in particular I think is going to be relevant I think to our fund space. And that is with regard to, sorry, I'm just moving the slide here. And that's with respect to the changes to downward attribution. And I think one of the unexpected sort of realities of the TCJA is we had a lot of foreign corporations that were newly minted CFCs and I think there were a lot of folks that were sort of caught unawares and off guard and it's led to some fairly onerous results for a lot of structures. And so what do we mean by downward attribution and what's the exercise here? And essentially just to go back to the beginning, what we're concerned with in terms of controlled foreign corporations is we're subject to a special regime, which is essentially an anti-deferral regime.

And now we have necktie, we have sub part F, it allows corporations, foreign corporations that are majority owned by US shareholders, meaning 10% or more voting or value owners that are US residents. Those individuals need to pick up certain inclusions. And so what attribution does, and again 9 58 is the section that determines US shareholder status, looking at both direct and indirect interest through a chain of ownership under 9 58 A and under 9 58 B, looking at constructive ownership as well. And so 9 58 before prior to the TCJA prevented downward attribution, what do we mean by downward? Essentially it's attributing ownership to an entity from its parent company. So in other words, parent company owns stock in a foreign corporation. Now the subsidiary of that entity is also deemed to own shares in that corporation. So that's what we mean by downward.

You can see here we've got a structure shown. Again, this was a very common type of structure that we saw get affected by these provisions, but essentially from the onset of TCJA until 2026, where we have the OBBA fix is we had a situation where anytime there was a US corporation, again, you think about a large inbound structure or some private equity structures, there's multiple chains of corporate ownership. Here we have a domestic corporation shown as D that's a subsidiary of a foreign parent and we have an upstream US investor. And I think a lot of the consternation came where under this structure investor U, which is a 10% US ultimate investor, is deemed to have ownership in A CFC and namely fc. That's because again, under downward attribution, D was treated as owning the same shares that FP owned, which means D was deemed to own FC and therefore FC was a controlled foreign corporation.

There were some ways to mitigate that, namely through check the box selections. But with a lot of these larger foreign structures and even fund structures that CFC taint was difficult to shake and created some significant implications for those investors. And so what OBBA did in a fairly detailed way was it re-implemented 9 58 before. So now that statute is back to its pre TCJA reading, but it created a new code section under 9 51 cap B that creates a whole, almost a parallel system through new terminology. And so you'll hear the term now F CFCs, which is foreign controlled foreign corporations and F-C-U-S-S-S, which is foreign controlled US shareholders. And so essentially what they've done is the initial concern, I think the initial drive behind the repeal of 9 58 before in the TCJA was to prevent a, most commonly it was inverted entities. So US companies who inverted into foreign ownership, they were able to, in some cases DECONTROL or DCFC by contributing what were formerly CFCs, having the foreign parent contribute other assets or entities into a new structure and essentially have those US entities get under 50% ownership.

And so what this new section does is it for specific purposes of applying these definitions, it says we're going to keep the repeal of 9 58 B four solely for the purpose of determining an FCFC. And so in this case, you can see with that same structure as the last slide, we no longer have CFC issues. So investor U is no longer deemed to have ownership in FC as A CFC, but you can imagine a situation, let's say where D is a 10% owner in fc and sometimes we see those ownership splits in that case D is A, and even in this structure D is a foreign controlled US shareholder, which means that if it owned any 9 58 a meaning direct ownership in fc, that would create a foreign controlled foreign corporation and potentially there would be income conclusions and almost an alternate CFC regime would apply there.

So you can imagine, again, this is a welcome change. I think the question arises whether there's going to be almost a parallel regime at play. In other words, are we replicating the CFC rules for F CFCs and what are some other kind of ancillary changes to keep in mind? And I think again, the benefits are pretty clear. I think where we have those upstream investors that are US investors, they don't necessarily have to worry about CFC rules applying anymore. But where we have an FCFC being deemed, again, a number of questions arise I think primarily of which is for these entities you might hear the term never CFCs or former CFCs for these entities that are former CFCs, if there have been inclusions in the past and we have an investor who recognized the subpart F or guilty inclusion, what happens to that previously taxed DNP?

In other words, there should be a basis adjustment with respect to that foreign corporation under 9 59, a distribution of that PT E comes first. Does that PT e retain its character? In other words, does any distribution flow up to that investor tax free? And you can imagine the complications with regard to record keeping and maintaining those P TEP accounts and so expect a lot more guidance in this area. I think there's good reason to be optimistic on the P TEP front, but other issues come up as well in terms of PFIC overlap, which we'll talk more about generally that pfic holding period begins when the CFC status ends. Well, we may have cases where we have A CFC under the TCJ rules that's no longer A CFC starting in 26, but what if that holding period extends prior to 2017? Are those investors able to make PFIC elections?

I think more to come on that front, but you can imagine 9 54 C six we had that extended permanently. What do we do with, again, is it a parallel regime where we have let's say FCFC payments to another FCFC? Is that going to be, are we going to apply the same kind of look through approach as we do to CFCs? So more to come. I think there's a lot that was bitten off here and I think we'll see the impacts of that going forward. A couple items that again come up in this context is as we talked about the PFIC overlap, generally 1297 D provides that if an investor has an investment in A CFC, at least with respect to that investor, they don't also have to apply the PFIC rules. Nonetheless, a foreign corporation even that's classified as A CFC can also be a pfic with respect to a US investor. And so as fund managers and tax preparers, we have to be cognizant that as we push up K threes to those investors, we have to report information that both CFC US shareholders could take into account as well as PFI shareholders. And sometimes it's difficult to get that upstream information. So we have to make sure that info is available.

But again, just looking at kind of the structure chart here, just looking at that 10% ownership threshold, right, is where we have a US partnership with ownership in a foreign corporation, that foreign corporation is A CFC because the US partnership, we don't apply aggregate treatment for purposes of CFC determination. And so because FC is A CFC, US two as a 10% owner in the partnership is a US shareholder with respect to that CFC, they would apply the CFC rules. US one though, as you can see as a 5% owner still has to maintain and the fund would still need to apply PFIC testing, which in theory is quarterly and make sure that those PFIC amounts are passed through on the K three. And so we really have a kind of dual exercise here and we have to be flexible and forthcoming in terms of that tax reporting to make sure that all those investors are served and have the information they need.

Another issue that comes up, and again this is more of kind an inbound concept, but the portfolio interest exception is really commonly it's a common tool for foreign investors who are looking to take a credit interest in the US and typically that's in a real estate context but not always. And so how does this interact with downward attribution? Well, we now have entities that are a larger universe of foreign corporations that are not CFCs and the portfolio interest exception does not apply to CFCs. And so again, you can imagine a fund structure where we have a CFC taint by virtue of a US subsidiary somewhere in the structure we now have again foreign corporations that maybe it's a treasury center or a FinCo within a larger inbound structure that entity may be able to lend to its US affiliates and we can apply the portfolio interest exception for a lot of those FinCo or treasury centers. We may already have a treaty jurisdiction in place, but for those that don't, again, just to refresh on the portfolio exception, it's generally applicable where if the loan is in registered form essentially meaning that there's a notification requirement where the holder transfers ownership, that needs to be within the debt agreement and the I IRS's concern is just to be able to track who owns that.

And this is something that can be off and miss and our RESIG folks can certainly help with this. But we need to make sure again with a foreign feeder structure for example, that we have W eight documentation for all of those upstream investors. That is a precondition to receiving this exception. And again, the upshot is with the portfolio exception, whereas generally interest is subject to 30% withholding, that can be reduced under treaty. But the other sort of exception is with 8 71 H, the portfolio interest exception gets rid of that 30% withholding and allows 0% withholding to apply.

And again, generally there's a 10% ownership threshold and that's a common planning item. But just to keep that in mind again, as you're looking through your structure kind of doing a refresh for these O-B-B-B-A changes, this is something to consider and again, this is certainly something we can help with in terms of implementation. As a final thought here, kind of unrelated to OBBA, but something that comes up a lot in the fund space and certainly something that is still on folks' mind and it's a case that's currently in appeal but you may be familiar with the YA global case, I think that was decided in 2023 and it touches on this issue of whether income at a fund level is either feed app or ECI and we'll talk through what that means and the implications. But essentially with respect to foreign investors, the US has two different regimes.

One of them is feed app, which is essentially fixed determinable, annual periodic payments payments you can calculate. So portfolio type payments, interest dividends, royalties, these are feed app payments that the IRS actually imposes a gross basis withholding on. So it's not trader business income that's taxed on a net basis. It's 30% of any feed app payment is subject to withholding that's done on a form 10 42 whereas ECI is income that's effectively connected with the US trader business. And so the question that can arise in a fund context is, okay, I have sort of a fund, I have a management sponsor as a separate entity off to the side. To what extent could that fund be deemed to be engaged in a US trader business and if it is deemed to have a US trader business, to what extent is any type of otherwise feed app income or capital gains can that income be attributed to the US trader business?

And generally that sets a fact and circumstances answer everyone's favorite thing to hear. But 8 64 B really provides two high level tests, the business activities test and the asset use test. Really what those tests look at is to what extent do the assets that give rise to that income, to what extent are those assets supervised by a US office and in a business activity test. To what extent are those activities co-managed again typically in a US office. And the YA global I think took an interesting position on that case. Just by way of brief background, Yorkville advisors was a fund sponsor, YA Global was the fund was a foreign feeder fund. They were involved with small cap companies and they were a credit fund.

Essentially they were looking at convertible debentures looking at public securities and making convertible debt investments. And the IRS found again the facts were interesting in that the sponsor Yorkville advisors in their marketing materials had marketed that they've marketed themselves as underwriters. So essentially saying we're going to come in and take commitment fees, certain deferred acquisition fees and essentially they were underwriting or involved in sort of the negotiation of those commitment fees in the US. And so I think what the case hinged on was essentially because the sponsor was deemed as an agent of the fund itself and because those that income that the sponsor earned was considered services by virtue of being an agent, those services were deemed to be US trader business income and the IRS assessed a large tax amount for unmet withholding and filing penalties. So I think the key thing there is again this agency relationship being deemed, what that hinged on was that in the intercompany agreement between YA global and the fund y, A global was allowed to provide instructions or allowed to advise as to investment restrictions.

The IRS deemed that as having instructive power over the sponsor and that's where the agency relationship came in. So I think to the extent it's worth looking at where you've got your sponsor performing any kind of activities, I think best practice would be to make sure that the sponsor has unlimited ability to trade for its own account and does not need to be given instructions by the fund at all. In addition to the extent that you're looking at or you're labeling income as fees or anything that might conjure services, you may want to look at that and potentially those labels can be very important and so something to keep an eye on and we'll see how the appeal goes. But again, happy to help folks take another look and refresh here as we enter 2026. So with that I may have worn out my welcome, but I will put up a polling question here and again, I just would reiterate just yesterday we received three IR notices about some of the OBBA changes and the IRS's intent to issue regulation. So if you thought we were done being blind on paperwork with proposed regs, think again. But again it's always interesting and it keeps us going so we'll let everybody take a few more seconds here

Irina Kimelfeld: Rob on ya global. I think one of the things that the court has sort of hammered on is talking about protective filings around the withholding, right? What the case really assessed was the withholding liability under 1446. So do you see more clients filings, protective filings where they think they have a different risk profile of potentially elevated risk profile with respect to being deemed to being a trader business?

Robert Hallman: Yeah, I would say, I would say it's not been sort of market, but I think certainly as a best practice and particularly when you're using Cayman vehicles or even treaty jurisdictions, Luxembourg and so on, we have told our clients that is certainly a best practice and it's not an intensive compliance exercise necessarily. And so we've seen an uptick. I think best practice, again we start that three year clock with the statute and I think the YA global facts went back to 2006, 2007. So you can see how long some of these issues can go back and so starting that statute is critical and certainly something we help a lot of our clients with.

Irina Kimelfeld: Right. I think there was a question here, what type of notice, you alluded to three notices being received from the IRS. If you can maybe expand for a minute on what those are.

Robert Hallman: Yeah, I think generally I think the 1120 Fs sometimes we'll see notices related to, again in a treaty context it's form 88 33, which outlines generally a permanent establishment threshold. We've seen some notices there. I'd say those are few and far between. I would say a lot of times the starting point is 1441 type reviews, looking at those payments and the W eight reporting associated with that, looking at the intercompany agreements. So transfer pricing's an area. Again, as an international guy, I can't use that term enough because just by looking at the fund or pulling it up on audit, understanding that intercompany relationship with the sponsor, it's not purely related, there's not common ownership. That's another avenue for the IRS to really peel the layers down. So I would say that's probably the most commonplace we see it is on audit, the IRS looking at the sponsor relationships, understanding the payments across those entities and dig it in that way.

Irina Kimelfeld: Okay, thank you Rob. We're going to and thank you for everybody for answering the polling question. We're going to move on to the state and local updates and the tax trending topics and I'll hand it over to Denise.

Catherine Kauffelt: Good morning. I'm going to start you off with our state and local presentation. My name is Catherine and I'm so happy to be here. It's really a pleasure and I know state and local tax is everyone's favorite topic. There's always a problem with California or New York, but luckily Denise and I have that covered. I'm in California, she's in New York. So we're going to start off talking about income tax, apportionment and sourcing of management fees, which can be a huge deal and also a great planning tool. So this is something to look at not as a burden but something we can work with to optimize your taxes. So there is an evolving landscape, state income tax, apportionment issues for asset management companies have just become increasingly complex. Whether that's sourcing of management fees like we're talking about or carried interest, there are tons of regulations and completely different treatments from state to state post Wayfair, which was one of the highlights of my early career.

I think my first year out of law school, Wayfair came out. I remember waiting on bated breath to see how the court ruled on that one and that was when the Supreme Court changed nexus for all of us that you do not have to have physical presence in order to have Nexus. That's where states started adopting economic income tax nexus thresholds to pull in that income. There is also a major shift happening from cost of performance sourcing. So that's where the service was performed versus market-based sales sourcing. So that would be where the benefit is received. Most states are shifting to that market-based sourcing. That's definitely the trend, but there is cost of performance still worked in there. Fund management companies will face a difficult compliance environment because of all of these complex nuanced rules around income sourcing. So key questions for fund management companies to keep in mind is there a state return filing requirement based on economic nexus? So that can be more simple. In California we have a bright line threshold, which is very helpful.

How are management fees sourced under every state's rules? Again, very important to take a look. I would review this at least once a year because rules are constantly changing. Are there look through requirements to source based on your LP location. So this is a new trend coming up and California itself, my home state is moving towards this position. I'm going to get into the specific regulation changes that have come through this year. But the franchise tax board unsurprisingly, is taking an aggressive position on management fee apportionment. So they're starting to look through. So sourcing fees based on your LP location again, where is that benefit received market-based versus where was the work perform cost of performance. And this is just a great example. So you have a New York based manager, you have $2 million in fees, 25% of that is coming from California LPs. So we have 25% of that 2 million being sourced to California.

The regulations are written for mutual funds, but the FTB is applying them to hedge funds and PE and for qualifying investment partnerships. Carried interest may avoid California taxation for non-resident managers. But again, there are complex rules here and there needs to be a clear connection between the interest and the business activities in California. But don't assume just because you are outside of California that California cannot reach you. So it's really important to look where are your investors, where your operations, where is the benefit being received? Or New York, they have completely different rules because of course they do.

Denise, however, is going to be covering this in a little bit. She is the fabulous Denise Meki, so she will be dazzling you with that. So I'll move on, keep going with California. So after about a decade of talking about these regulations, I cannot tell you how many my entire career basically we've been trying, California has been trying to pass these regulations. So they have finally adopted and finalized the market-based sourcing regulations September of this year. And this is going to be effective starting January 1st, 2026, which I cannot believe is less than a month away. This, as I said, just ends a long regulatory process dating back to 2016. And so everyone has probably heard that this has been coming, but we're finally here. Finally time to look at it. And specifically the amendments are to the CAL code regulations 25 1 36 dash two.

They are going to be taking the look through approach for asset management services and they're defining asset management services as direct or indirect provision of management distribution or administrative services to funds. And instead of looking at the fund level, the revenues are going to be sourced to the location of the investor or the beneficial owner. So again, market-based sourcing, where is the benefit being received? And now California is going to be saying you have an investor in California, the benefit is being received here, this income could now be pulled into California. However, there is also the opposite, right? Maybe this could actually be beneficial for your fund in apportionment because you don't have investors or beneficial owners in California. So again, this requires an analysis, but on its face it is not bad necessarily. It's very fact dependent on what's going on with you. So California apportionment, the receipts will be assigned to California and proportion to the average value of interest by California domiciled investors. And the domicile presumption is the investor's billing address. So that address that you're sending the K one to that will be their assumed domicile.

So impact on fund management companies. So out of state managers could now be subject to California income tax on proportionate fees. Nexus could be created and a filing obligation could be created just solely based on having California investors. Like I mentioned earlier, this could actually benefit you. So in-state managers could benefit if most of their investors are outside of California, this could drastically decrease your apportionment. But again, there's a significant increase in complexity and tracking requirements. We realized that there could be many investors, this could be very arduous to track, but again, it could be good, it could be bad. This is worth thinking about for your planning to optimize your state taxes. So thinking about compliance and implementation. So data tracking, maybe you don't know, you're not looking specifically pulling data related to the location or domicile of your LPs. So this is an important step in this. So thinking about that, if you think this could benefit you or that California could now be pulling you in, this is a really important step. So look at your contracts, look at investor communication, internal records, and if your domicile data is not available, the method for which you determine domicile needs to be applied consistently, reasonably and based on evidence the FTV will consider.

Irina Kimelfeld: Yes. Yeah, sorry. So when we talk about a look through and what are you sort of seeing when we look through how many levels are you looking through? So in the fund to fund context for example, if the address is in California, if the fund to funds is in California, you need to continue looking through that data could very well not be available. So what are your thoughts or what are the state's thoughts on how far up do you keep looking? And if you don't really have it in my scenario where you have a fund of funds that's addresses in California and address in California's presumptive California, are people sort of stuck with that? Is that going to be your sourcing or is some presumptions that you can apply to go up the chain?

Catherine Kauffelt: So I think arguably you could go through the chain because again the state's really focused on where the benefit of the service is, benefit of this is being received. I think this is yet to be litigated how far they can go up and down, which is very fun for me as a professional and nerve wracking for fund managers. So I think this is, yeah, this will be the start and seeing how they start enforcing this as of January 21, 26,

Irina Kimelfeld: Right, and I think though there's a question that came up, I think that that's really interesting. I'm pretty sure the answer to that is no. But this applies to fees. This would not apply to carry, right or performance.

Catherine Kauffelt: Yes, we're specifically talking focusing on fees here carried interest is a little bit different because it's that distributive share of partnership income. But yes, we're focusing on management fees and the income sourcing changes that affected that. Alright, thank you arena. Wonderful questions. I love interaction. Love it when people are interested in the state because usually it's just me. So our investment partnership exemption still applies under our new regulations. So income from a qualifying investment securities of an investment partnership is not California's source income for non-residents. So I know everyone is going to be happy about that. So the requirements for an investment partnership are 90% plus of partnership assets and qualifying investments. And then qualifying securities are stocks, bonds or our other marketable securities. So exceptions where non-residents are taxed because there is always an exception isn't there? Qualified investment securities that are interrelated with non-resident partners, other California business.

So the partner may be being pulled into California with other activities. So that's an exception that will require more complication if the partner participates in management of investment activities. This could also pull them in depending on the activities, corporations that has other California source income beyond investment partnerships. So again, this is the corporation itself is being pulled in or the fund itself is being pulled in based on other activities. Maybe you have physical presence in California, there are other things going on. Investment partnerships are, the exemption is just not affected by the new asset management sourcing rules. So great news, there are some additional considerations that are going to be coming through and one of the biggest ones is San Francisco. So as we all know, San Francisco has significant business taxes and gross receipts taxes, that is my hometown, so don't hate on it too hard, but they are implementing similar look through rules for gross receipts. So again, California itself and then also the cities, the local jurisdictions especially San Francisco can really affect you and have high risk, high liability. So it's important that you're looking at this data, thinking about it, thinking about your presence. If you see you have investors in San Francisco and California, this is something to note. So withholding obligations, you should be reviewing your withholding obligations because these new California filing requirements will trigger withholding for non-resident partners. And then there's also the PT e interactions. So how is this going to interact with your California PT E?

So yes, the action items on this would be assess your investor base, model California tax impact and implement those before 2026 or as you're going into 2026. Yeah, so we love it. Alright, we have a poll and so when does California's final regulations become effective? I may or may not have said it a couple times. So is it a January 1st, 2025 B tax years beginning on or after January 1st, 2026 C, September, 2025, four D, January 1st, 2027. Please let me know.

Irina Kimelfeld: One of the questions here is has San Francisco been passed yet?

Catherine Kauffelt: Yes, it has been adopted. So this is just an extra complication with California, but they have been adopted and they're going to be changing in next year as well. Remember the San Francisco gross receipts filing deadline is at the end of February for 2025. So please take some time. This is the perfect time actually to review whether you would need to file or not.

Irina Kimelfeld: And today the extended management companies receiving a performance fee as opposed to an allocation from an offshore feeder, right? So I think we have that in certain instances. Would that be now? Well I guess the feeder would be considered the ultimate owner, right? So it should be sourced to account for, sorry, would you repeat that? So to the extent the feeder is paying the performance fee, right, but it's still a fee, it's not an allocation that would be treated as a fee, but then the offshore feeder would be sourced outside of California by being offshore, correct?

Catherine Kauffelt: Yes, absolutely can be. Again, California is really fully moving over to that market base, so they're looking where is that benefit received? Alright, great job guys. Thank you for being awake. I'm going to hand it over to the fabulous Denise Mades gave.

Denise Moderski: Thank you Catherine, and thanks to everyone for being here with us. What I'm going to go now is moving switching gears to New York City. And New York City came out with a proposed regulations applicable to C corporations. So it is important to know that the rules that I'm going to go over only applies to a C corp. S corporations in New York City are under a different regime, which is under the GCT and partnerships. Also FOLLOW has a separate set of rules which is under the UBT. So as you know with some states, whether it's a corporation or if it's a pass through entity, the rules may interplay about between each other. But New York State, New York City specifically have different set of rules if you are a C corporation or if you are a pass through entity. And then there's another layer of differences between New York state in New York City versus in New York state, a corporation, a C corp and an S corp follow the same rules.

In New York City you have three sets of rules under an s corp partnerships and C corp. So this overview will be related to applicable to C corp. So New York City came out, they released their first draft of the rules and then there was a hearing scheduled for November 20th with a 30 day commentary period. And once all the nine chapters which are going to be introduced on the bill, once they're finalized, these rules will be adopted. Note to keep in mind is that we are not sure in terms of when these rules would apply, if it's going to be applicable starting in 2026 or if it's going to be retroactive. When New York State came out with their corporate rules in 2023, they actually made those rules retroactive to 2015. So we're unsure what the city, which approach they're going to take, but it's something to make sure to be aware of and how this impact asset management clients and so forth.

So here's a high level overview of what's on the bill. Economic nexus, as Catherine mentioned, right? A lot of states are shifting into an economic nexus in order to impose on taxpayers. So you don't necessarily have to have physical presence in a state in a particular jurisdiction to have nexus. So New York City has this threshold and there is a bright line test which is 1.28 million in 2024. Generally this gets adjusted for inflation. So this is currently for 2024 complying groups. If you have a unitary combined group with your affiliates, the threshold is a little bit different. It's about 12,000 in New York City receipts and then you aggregate it and very important to know if you have any receipts that are exempt for income tax purposes under public low 86, 2 72 protection. Those receipts are part of your pool when you are determining whether you have nexus in estate or not.

Other things market based sourcing. So market based sourcing applies to corporate taxpayers in New York City. And this is particular relevance to asset managers. There is a specific provisions to management companies. So if you have management companies and they are generating management fees, let's say from a fund or an offshore feeder, and to the extent there is in New York City beneficiary, so this is the key where marketplace can be a very gray area because when they talk about the beneficiary, the question is well who is considered the beneficiary? Are you talking about the direct beneficiary? Could it be an intermediate party? And then the end user, we've seen this with a lot of states where Connecticut is not a good example, they have a definition of your ultimate beneficiary, right? Ultimate beneficiary meaning that they're looking through the investors like who's ultimately getting the benefit. It's not the fund per se, but are those investors of the fund.

So very similar here in New York City, if you have management fees, right? If you have a C corporation management company managing funds and they are New York City owners or shareholders or even if it's a foreign company and they are New York City that could trigger Nexus for that entity, there are 50 categories of receipts. New York City, just like New York state, they have very broad rules in terms of what type of category. If it's digital assets, if you're talking about securities, how do you source management fees? So they're very good and there are a lot of examples which is super helpful in case you are ever wondering, well how do I source it? Which methodology do I approach, do I use to calculate my source income? It's a good reference to look at those examples. And also one thing to know is New York State has rules and they have a little bit more flexibility in terms of corporate blockers.

So if you have corporate blockers getting a K one interest in a partnership doing business in New York City, New York state has some exceptions for those corporations, those limited partners, they may not have Nexus, which is very different from New York City because New York City is a little bit broader, right? Generally if you have a corporate blocker that's getting the K one for a pass through with New York City source, that would trigger nexus to the corporate blocker. Another big thing which has been contentions with New York City is that, and we've seen this allow during audits where you have a corporate blocker and they're claiming a UBT credit from a pass through entity. The city took the approach of using the partnership rules, sourcing rules at the corporate level, which is different from New York state because for New York State, for those that are familiar, when you have a K one from a partnership, there are two sets of K one, there's an IT 2 0 4 ip which follows the partnership rules for your non-resident individuals.

And if you have a corporate partner, whether a C-corp or an S-corp, you have a set of it 2 0 4 cp, which is sourcing computes your sourcing and income based on the corporate rules, which is a market-based approach. New York City was taking the position that for a corporate blocker you have to source using the partnership rules. So now they seem to be shifting away from that, which means it's going to mirror the same way as the state you compute when you aggregate your factors from the pastor investment, you have to use the corporate rules and aggregate it at the corporate level and that's how you report it. So planning opportunities here is to revisit with these changes. Now could this potentially trigger nexus for C corporate blockers in New York City or management conference in New York City, PE VC structures to consider is their nexus. If you have been filing for example, and you are let's say sourced in a hundred percent or a higher apportionment, it's a good time to revisit that and see based on these rules, how does that impact your New York City source? New York City has a pretty high rate for corporations. It's I believe 8.5 or eight point, it's in the 8% range. And also how does this impact your management companies?

I know we're running short on time Astrid, so we can go pretty high level on some main changes with OBVA and how does that impact for the state.

Astrid Garcia: I'm going to jump in really quick. I'm just going to push out the last poll just to give the audience enough time and then we can go back to this slide, which is number 30. So we'll be pushing out the last poll right now. Make sure that you submit your answer and then if you want to continue at least talking and then we'll push back to the last.

Denise Moderski: So big things on OBBBA. We were not going to go through every single state and their approach in terms of conformity because over their eyes we'll be here for a really long time. But big thing is that there are 50 states, each of them have their own rules and there are three ways, there are two ways where a state either follows the federal changes or they decouple. It's one are the rolling states, which are states that automatically follow any changes under the federal rules. Now those states may choose to decouple from some of those depending on which approach. So I think this is a very important area to make sure that if you have any states that are rolling and that automatically follow the federal rules, has there been any guidance from those states decoupling from certain provision? And we have a list on, we have a slide here. Can I go to the slide really quick just to show?

Astrid Garcia: Let's give it about 10 more seconds. The poll is already closed then.

Denise Moderski: So here's just a list of some rolling state and that generally follow the federal changes, but they have specifically the couple, for example, Alabama section 1 74 expense. You have Pennsylvania for corporate taxpayers. They have several provisions that they decouple. And then you also have those states like Maryland and Virginia, depending on the impact of those OB three changes to their state revenue, if it's 5 million for Maryland, 15.9 for Virginia, how is what approach are they going to take? So again, this is just very important to, as you're planning into going into 2026, what does that mean for the state? How does that impact from a compliance estimate, extensions payments coming up, what are states that we need to consider?

And then one last thing we'll cover. I know we're over time so I really apologize, but this is a good alert just for everyone to be aware of. Under the Federal Corporate Transparency Act, that is no longer applicable, but New York has come out with their own rules, LLC, which most of it mirrors the federal law and requirements, but this reporting requirement still applies for New York state. So be aware that there is a filing effective January 1st, 2026. And this applies to LLCs that are either form or authorized to do business in the state. That could be an S corporation, that is an LLC or a C corp that is an LLC or pass throughs just all applies to LLCs. And there are some exemptions which is again very similar to federal like a management companies, it's an example. But if you are examined, if you are determined to be exempt, make sure that you do comply with the exemption requirement.

There is still a report that has to be filed with the state. So here just on filing deadlines that applies if you are existing LLCs, this is due by January 1st, 2027. If there are new LLCs, meaning form after January 1st, 2026, you have 30 days of formation to file this report. And this is an area that we generally recommend consult with counsel, make sure are there any requirements, are there any exemptions? And if you do have one, make sure that you're filing those reports with the state and that will bring us to the end. Unfortunately, we didn't have a chance to cover everything in detail, but we wanted to make sure at least we highlight the main things and what applies things to be aware of as we go into the new year. Thank you everyone

Irina Kimelfeld: For your time. Take care everybody. Thank you everybody for attending our webinar. If you have any questions that have remained unanswered, we will be getting back to if you submitted them through q and a or if you would like to reach out to any one of us with the follow-ups, we would be happy to chat with you or reach out to your engagement teams if you have engagement teams with Eisner. Amber, once again, thank you very much for attending our webinars and happy holidays.

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