August 2003
By JAMES S. ANCHIN, CPA
I recently indicated how the federal changes under "The Jobs and Growth Tax Relief Reconciliation Act of 2003" will affect you and your business. As important as these changes are, New York State and New York City have also enacted tax law changes that will further impact residents, as well as non-residents with New York source income.
Income Tax
For the years 2003 through 2005, New York State has increased its personal income tax rate to a maximum of 7.7 percent from 6.85 percent; New York City raised to a maximum of 4.45 percent from 3.648 percent. The true cost is even greater though, as the lower graduated rates are phased out beginning with $100,000 of adjusted gross income. While the state's new 7.7 percent rate only applies to taxable income in excess of $500,000, taxable income in excess of $150,000 ($100,000 for single or married filing separately) is now taxed at 7.5 percent.
As currently enacted, the 7.5 percent rate will decrease to 7.375 percent in 2004 and 7.25 percent in 2005. In 2006, these "temporary" rate increases are scheduled to expire, although previous experience has shown that these expiration dates are frequently postponed.
In addition to the obvious cost of the rate increases, there is also a hidden cost. With the concurrent reduction of the top federal rate to 35 percent, many more New York State/City residents will now find themselves subject to the Federal Alternative Minimum Tax. These taxpayers will not receive a federal tax benefit for the additional state and city taxes paid.
State Estimated Tax
The rules with regard to "safe harbor" estimated tax payments by individuals have also been changed. Previously, no penalties would be incurred regardless of the amount of current tax due if an individual made estimated tax payments based on 110 percent of the prior year's tax. In order for this rule to apply in 2003 however, the 2002 tax must now be adjusted to take into account the higher tax rates reflected above.
Pass-through Entities
From a strict compliance viewpoint, the most troubling provision of the new law concerns New York State estimated tax payments required to be made by pass-through entities such as partnerships, S corporations and Limited Liability Companies (LLCs). Beginning in 2003, pass-through entities having income from New York State sources are required to make estimated tax payments on behalf of any nonresident individual or C corporation owners with respect to their share of income. These estimated tax payments are required at the entity level and not at the individual level. The individual will then claim a credit for the entity level payments on his or her personal income tax return. The payments on behalf of the individual partner (member or shareholder) will presumably be reflected in that individual's capital account as a distribution.
These new rules leave many unanswered questions. What if the business agreement does not provide for distributions to that individual? Perhaps lending arrangements do not permit distributions, or perhaps some partners are entitled to priority distributions. There could be many reasons why a specific partner is not entitled to a distribution. Nevertheless, under the law as written, the estimated payments must be made or the entity will be subject to penalties.
This new requirement for pass-through entities is effective retroactive to Jan. 1, 2003, even though the new legislation was enacted only recently. Recognizing this, the State Legislature has permitted make-up provisions, allowing taxpayers to make up the "delinquent" April 15 and June 15 estimated tax payments with subsequent payments. However, the State Legislature has (intentionally or unintentionally) not taken into account that individuals may have already made prior estimated tax payments against the same income. Any overpayment resulting from these duplicate payments would not be refunded until the taxpayer files his or her 2003 personal income tax return.
Another problem with this requirement is that it does not take into account the individual's personal tax situation. Conceivably, an individual may not have a tax liability due to other losses or deductions and, therefore, would not otherwise be required to make New York State estimated tax payments.
Hopefully, additional guidance will be available before Sept. 15, the next estimated tax payment date.
Accelerated Business Write-Offs
The recent federal changes grant valuable accelerated bonus depreciation deductions. However, what Congress has given for federal purposes, the New York State Legislature has taken away for state tax purposes. The bonus depreciation will not be available when computing New York State tax. However, the New York State rules apply to years beginning after Jan. 1, 2003 for property placed in service after June 1, 2003.
Sales tax rates have been increased for transactions occurring between June 1, 2003 and May 31, 2005. The legislation temporarily increases the New York State sales tax rate by .25 percent to 4.25 percent and the New York City rate by one eighth percent to 4.125 percent. Taxable New York City transactions will be subjected to a combined rate of 8.375 percent.
Prior to the new legislation, clothing and footwear costing less than $110 was exempt from state sales tax. This exemption has been suspended for the period June 1, 2003 to May 31, 2004 and is replaced with two, one-week exemption periods in January and September.
New York State personal income tax forms will now contain new lines for the payment of state and local use taxes. These taxes are typically due on purchases from catalog and Internet vendors that do not collect New York State sales tax.
Filing Fees and Other Changes
The filing fees for limited liability companies (LLCs) and limited liability partnerships (LLPs) are increased from $50 to $100 per member, with a minimum fee of $500 (increased from $325) and a maximum fee of $25,000 (increased from $10,000). In addition, a new minimum-filing fee of $100 is imposed on single member LLC filers. The payment of these fees must be made within 30 days after the end of the taxable year. The increased filing fees are applicable for taxable years beginning in 2003 and 2004.
Beginning Sept. 1, 2003, New York has amended its tax rules to better capture tax on the gain recognized on the sale of New York State real property (other than a principal residence). Although the mechanics have not yet been announced, it appears that a non-resident seller of New York real property must estimate his or her liability on the gain and make payment to the Department of Taxation and Finance. It is not known how the rules will be applied when the seller is a partnership (or other entity) with New York State nonresident partners.
Consult with your tax advisor to determine how the tax law changes will affect you and your business.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.