Corporation Business Tax Regulations Coming to New York City

by David Jasphy, McDermott Will & Emery LLP – September 12, 2024

Ten years after New York City introduced the business corporation tax, it is finally preparing complementary regulations. New York State adopted regulations in December 2023 to implement its 2015 corporate tax reform legislation. The City has said that its “regulations would substantially parallel the State’s corporate tax reform regulations [but] in several respects, the City is considering departing from the policies contemplated in the State’s regulations.” One area of divergence is “the allocation of flow-through income from partnerships.”

New York City imposes a tax “on the unincorporated business taxable income of every unincorporated business (i.e., partnerships) wholly or partly carried on within the city.” Where a corporation is a partner in an unincorporated business, items of income or gain from a partnership will be allocated under the statutory and regulatory rules of the unincorporated business tax (UBT). The corporate partner can claim a UBT paid credit on its business corporation tax return to the extent it was required “to include in entire net income its distributive share of income, gain, loss and deductions of, or guaranteed payments from such unincorporated business.” The City indicated that it intends to maintain this regime in the coming regulations.

When comparing New York City’s regime to New York State and New Jersey, there are some notable differences.

New York State

Although New York State does not impose an entity-level tax on partnerships, it does require corporate partners to compute their liability using the aggregate method. Generally, a corporation must use the aggregate method if it “has access to the information necessary to compute its tax using such method.” A corporate partner is presumed to have access to the necessary information if any of the eight regulatory factors are met, including if the corporation is conducting a unitary business with the partnership.

Under the aggregate method, the corporation “is treated as participating in the partnership’s transactions and activities” because it “is viewed as having an undivided interest in the partnership’s assets, liabilities, and items of receipts, income, gain, loss and deduction.” In other words, the corporation applies the corporate sourcing rules and includes “its distributive share of the partnership’s business receipts when computing its Business Apportionment Factor.”

Under the entity method, “a corporate partner is treated as owning an interest in the partnership entity [that] is an intangible asset.” In other words, a corporate partner “must include its total distributive share of income, gain, loss and deduction from [the partnership] as business income [and] such amounts from [the partnership] are then multiplied by a [business apportionment factor] computed without regard to the amounts from the [partnership].”

New Jersey

The Garden State’s rule is a variation on the themes described above. If the corporate partner is not in a unitary business with the partnership, then the corporation would add (1) “its distributive share of the partnership's business income . . . by only taking into account the corporate partner’s share of the receipts of the business that the partnership carries on directly” and (2) “the corporation’s entire net income, excluding its distributive share of the partnership’s income . . . by only taking into account the receipts . . . of the business that the corporation carries on directly.” If the corporate partner is unitary with the partnership, then the corporate partner should use the “flow through accounting” method. In other words, the corporate partner combines the factors of the corporation and the partnership and applies against its entire net income including its distributive share of the partnership’s income.