New York announces deviations from state corporate tax regulations

The New York City Department of Finance (“Department”) recently announced on its website that its still-pending corporate tax regulations as part of tax reform legislation on corporations adopted in 2015, are expected to contain several notable departures from New York State’s corporate tax. reform regulations that were enacted in late 2023. Although the city’s regulations have not yet been made public, the Department says its regulations will “substantially parallel” the state’s overall regulations, which were the culmination of a project lasting almost nine years. . However, the Department has identified five major areas where it is likely to deviate from state regulations:

1. Application of the Unincorporated Corporation Tax (“UBT”) sourcing rules to associated companies that receive a distributive share of partnership income.. The most controversial departure from state regulations would be how the City taxes associated corporations that receive a distributive share of the corporation’s income. State regulations generally apply the “global method” of taxation, which treats the associated enterprise as having directly earned its distributive share of the corporation’s revenue. For state corporate tax purposes, the partner company includes its distributive share of the company’s business receipts in its own allocation factor and applies the state corporate tax’s customer-based sourcing rules. companies in the calculation of its distribution factor.

   In its announcement, the department states that it will not follow this regulation but will instead use New York City’s UBT procurement – which does not apply customer-based procurement – to allocate the distributive share of the partnership income of the partner company for city corporate tax purposes. Any non-partnership business revenue earned by the partner company would be allocated separately using customer-based sourcing rules. It should be noted that the Ministry already applies UBT procurement to partner companies during audit, despite the lack of regulation, although the bifurcated allocation method between partnership and non-partnership income is a new development. Dispute has already begun on this issue.

   The Department states that City law provides it with significant flexibility in determining how the distributive share of a partner’s partnership income is included in the partner’s income. He also emphasizes that unlike the State, the City imposes a UBT on partnerships at the entity level. The Ministry’s announcement, however, does not explain how the overall method, whereby the partner company is considered to directly earn the partnership’s revenue, allows the application of UBT procurement to the partner company’s share in these recipes.

2. Allow deviations from statutory distribution methods based on individual facts and circumstances. The Department is considering departing from state regulations regarding standards of proof, which provide, for example, that the party seeking to deviate from the statutory distribution formula or overcome a presumption under a hierarchy of distribution methods must establish its right to such a derogation by “clear and clear evidence. “The department instead considers a more general standard based on “individual facts and circumstances,” saying a “clear and convincing standard” is unduly burdensome for both the City and taxpayers.
3. Distribution of income from passive investment clients using a fixed distribution of 8% when the location of investors is unknown. The Department intends to follow State regulations regarding the allocation of revenues from management, distribution, and administrative services provided to “passive investment clients” based on the location of sub-investors. assets in unincorporated investment funds, in the same manner as such revenues are obtained. when they come from mutual funds. It intends to deviate from state regulations where the location of these investors is unknown, under which these revenues originate from where the contract with the service provider is “managed” by the investment client passive. Instead, when the location of investors is unknown, the City intends to use a fixed allocation of 8 percent.
4. Increase the threshold for taxpayers to use the “safe harbor” billing address. State regulations provide a “safe harbor” for customer billing address for procurement when the taxpayer has at least 250 business customers who purchase substantially similar products or services and no more than 5%. of these revenues come from a particular customer. The Ministry intends to considerably limit the “safe harbor” by setting the threshold at 1,000 clients.
5. Retain the excess income inclusion for holders of residual interests in Real Estate Mortgage Investment Conduits (“REMICs”). The Department intends to depart from State regulations that exclude from total net income (“ENI”) the excess inclusion amount of a holder of a remainder interest in a REMIC which must be reported under IRC § 860E, asserting that there is no statutory authority for its exclusion from the ENI.

City officials now say they plan to formally propose corporate tax reform in early 2025.