February 2000

New Guidelines Issued for Reporting Partners' Self-employment Income

The New York State Department of Taxation and Finance recently issued new guidelines about how partners in partnerships that generate self-employment income should treat the 1999 repeal of the New York City nonresident earnings tax. The new technical services bureau memorandum, TSB-M-99(6.1)I, Revised Notice for Partners Making Estimated Tax Payments of the New York City Nonresident Earnings Tax, replaces an earlier memorandum TSB-M99(6)I, Important Notice for Estimated Tax Filers, dated September 1, 1999.

Last year, the New York State Legislature repealed the New York City nonresident earnings tax, but only for New York state residents. Connecticut and New Jersey residents challenged the constitutionality of this selective repeal and succeeded, at the trial court level, to have the tax also repealed for New York state nonresidents. New York state is appealing the lower court opinion but currently tax authorities will only apply the repeal to New York state residents. In the new TSB, the Department of Taxation and Finance assumes that New York state nonresidents still owe the New York City tax.

The TSB provides guidance on how partners of partnerships that conduct business in New York City should report their nonresident earnings tax for 1999. The bulletin outlines separate guidance for partners in the following categories:

* Full-year New York state nonresidents--All of their net income from self-employment is subject to the New York City tax.
* Full-year New York state residents who were not residents of New York City during 1999--Half of their net income from self-employment is subject to the New York City tax.
* Part-year New York state residents who were not residents of New York City during 1999--A portion of their net income from self-employment is subject to the New York City tax using an allocation percentage with the numerator 181 plus the number of New York state nonresidency days after June 30, 1999, and a denominator of 365.
* Part-year New York City residents--A portion of their net income from self-employment is subject to the New York City tax using an allocation percentage with the numerator of New York City nonresidency days before July 1, plus the number of New York state nonresidency days after June 30, and a denominator of 365.

Practitioners should note that the court decision creates some uncertainty as to the correct method to determine residency/nonresidency allocations in a year that includes moving into or away from New York City and state. The NYSSCPA strongly recommends that CPAs review the decision and related commentary before applying the guidance in the new TSB.

"Of course, if the cases currently being appealed throw out the selective repeal of the nonresident earnings tax, the tax treatment of all partners, regardless of residence, will be the same as that for a full-year New York state resident," said NYSSCPA New York State, Municipal, and Local Taxation Committee Chair Barry Horowitz. "But please note that income tax withholdings are still required on wages paid to New York state nonresidents in 2000."

To access a copy of the new TSB, see http://www.nysscpa.org, or visit the state's site at http://www.tax.state.ny.us/pdf/memos/income/m99_6_1i.pdf. *