New York City Makes Major Changes to the Unincorporated Business Tax
By Mark H. LevinAPRIL 2006 -Governor Pataki recently signed legislation that enacted long-awaited changes to the New York City unincorporated business tax (UBT). These changes go a long way toward conforming the UBT rules to those of the general corporation tax (GCT).
Statutory Method for Allocating Income
Since the inception of the UBT, the statutorily preferred method for allocating income within and without New York City was by using the taxpayer’s books and records. The law, however, provided that if the information in a taxpayer’s books and records was not sufficient to enable it to allocate its income, the taxpayer could utilize another method that would fairly reflect its income within and out of New York City, usually the three-factor formula utilizing property, receipts, and wages.
For taxable years beginning on or after January 1, 2005, UBT taxpayers are generally required to use the three-factor formula to allocate income to New York City. Those UBT taxpayers that were properly using the books-and-records method, may, in most cases, elect to continue using the books-and-records method for tax years beginning before 2012.
For taxable years beginning on or after January 1, 2005, UBT taxpayers may include rented tangible personal property in the property factor, valued at eight times the annual rent.
Sourcing of Income from Services
For many years, the UBT rules governing the sourcing of income from services stated that income from services was sourced to the location from which the service was controlled. This rule was especially burdensome to those whose work requires them to perform services at various locations. For example, an accountant whose office is located in New York City may also have to work at a client’s office outside of New York City. Under the old rule, all of the income from that client was considered to be sourced in New York City, because the work was controlled from the New York City office.
Starting in tax years beginning on or after July 1, 2005, receipts from services will be sourced to the location at which the service is performed. This change will be phased in over a three-year period based upon the taxpayer’s gross receipts as follows:
The above changes go a long way in conforming the UBT and GCT rules and simplifying the New York City business income tax structure.
The New York City GCT, originally scheduled to expire after 2005, has been extended through 2008. The New York City sales and use tax imposed on credit and reporting services, originally scheduled to expire after December 31, 2005, has been extended through December 31, 2008.
The New York City minimum personal income tax (IT-220) imposed at the rate of 2.85%, which was originally scheduled to expire after taxable years beginning after December 31, 2005, has been extended through taxable years beginning after December 31, 2008, after which the rate will drop to 2.5%.
The New York City additional personal income tax surcharge imposed at the rate of 14%, which was originally scheduled to expire after taxable years beginning after December 31, 2005, has been extended through taxable years beginning after December 31, 2008, after which the rate will drop to 2.5%.
Mark H. Levin, CPA, is manager, state and local taxes, at H.J. Behrman & Company, LLP, New York, N.Y.