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Conference Speaker: NYS Tax Issues over Residency and Telecommuting Persist

S.J. Steinhardt
Published Date:
Nov 16, 2022

Speaking at the Foundation for Accounting Education's Tax and Financial Planning for Individuals Conference on Nov. 10, Timothy Noonan, a partner and tax residency practice leader at law firm Hodgson Russ LLP, warned taxpayers and accountants to be aware of New York state tax issues regarding residency and telecommuting that began with the pandemic and haven't stopped.

The increase in remote work, as well as temporary or permanent residential moves due to the COVID-19 pandemic, have resulted in lingering tax issues. One of them is the “convenience rule” that governs state personal income tax. Known formally in New York as the "convenience of the employer" test, this rule determines where employees pays their income tax, based on the state in which they earn their source income.

New York has a “leave and land” rule to determine an individual’s tax status, Noonan explained. He discussed various scenarios, such as a hypothetical case in which a family moved to Connecticut in 2020.

“Did they land there?” he asked, rhetorically. “A question is where were they a resident during this period of time they were not here [in New York],” he said. “The question comes down to [whether] you landed if you intended to make the move permanent. If you intended to come back, the city or state will say you didn’t intend to make the permanent move.”

Saying that this seems to be 20/20 hindsight on the part of the state, he noted that there are now desk audits going on of 2020 and 2021 tax returns of people who left New York. “It depends on what the intention was,” he said, “You’d better have a good set of facts. You stuck your kids in school, you gave up your place, you’re there for a couple of years, maybe that’s good enough to prove a landing.”

In his hypothetical, a family, having moved to Connecticut in 2020, lived there part time that year, full time in 2021, then moved back to New York in 2022. “If this was just a COVID thing and they had planned to come back” because they stayed at their weekend house, “they didn’t leave and land," he said. But because they also spent more than 183 days in Connecticut, they would be considered full-time residents of that state, "so they could be double taxed.”

In response to situations such as this, Noonan said that New York state has been issuing desk audits, which he said occur every filing season since the pandemic began.

“Desk audits are all I’ve been doing for the past three weeks,” he said. “I must have seen about 40 of them in the last couple of weeks.”

Desk audits take the form of a letter with a residency questionnaire used in field audits and an income allocation questionnaire. Noonan called them “triage for real audits” designed to “catch low-hanging fruit” for people who left New York during the pandemic, told their employers not to withhold New York state tax and did not pay them.

Noonan said that six states had a version of the convenience rule pre-COVID, with New York taking a broad view of it.

If someone works from home for his or her own convenience and not due to any necessity of doing work at home that could be done in New York, the state considers that to be a New York work day. “That’s when desk audits started happening,” he said of these so-called convenience days.

Controversies arose when employers shut down offices during the pandemic, he said. The state would consider the worker to be working in New York, even if the employee was not or could not because there was no office to which to go.

“The state was looking the other way when offices shut,” Noonan said. “Now offices are open, but people can work from home if they want, so the convenience rule is back.”

There are ways to fix this and avoid a convenience rule problem, he said. Among them is opening a real office in the employee’s home state—“even one down the street”—that becomes a primary office. Another is to be assigned to another office. (“Be careful,” he said about that.)

Noonan also touched on important topics in New York state 2022-2023 budget legislation, including an election extension to the pass-through entity tax (PTET) . The PTET is a workaround to the $10,000 cap on state and local tax deductions imposed by the 2017 Tax Cuts and Jobs Act. It is an optional tax that partnerships or New York S corporations may annually elect to pay on certain income for tax years beginning on or after Jan. 1, 2021. Partners, members or shareholders of electing entities who are subject to tax may be eligible for a PTET credit on their New York state income tax returns. For 2022 only, the election date was moved from March 15 to Sept. 15. For entities electing after March 15, a portion of the estimated payments that would have been due earlier in the year had the election been timely will have to be paid with the election, he said.

The state also instituted a PTET fix for S Corporation shareholders. Effective Jan.1, 2022, 100 percent-owned S corporations are allowed to pay the PTET on all income. Previously, the PTET was limited to New York-sourced income for all S corporations even though New York residents pay New York tax on 100 percent of S corporation income.

In addition, New York City residents will be able to enjoy the same federal tax benefits for the city taxes paid on flow-through income that are available for the state taxes paid on flow-through income, retroactive to Jan. 1, 2022. This tax is known as the NYC PTET, for New York City pass-through entity tax.

PTET is “kind of a weird tax, because it’s revenue neutral for New York,” he said. “A lot of people want to pay this tax.”

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