The New York State Department of Taxation issued a report for the governor’s office detailing options to raise revenues for the state. One of the options the agency suggested was to impose taxes on “pass-through” businesses.
A “pass-through business” is a company in which income is generated through profits from a partnership. Under the new federal tax law, state and local deductions are limited to $10,000, but any taxes paid in operating a company at the entity level continues to be considered as a business expense, and, as such, can be written off. According to the Brookings Institution, approximately 95% of U.S. businesses are “pass-throughs.”
The NYS Taxation Department is currently offering two options: the first is to impose a tax modeled after New York City’s Unincorporated Business Tax (UBT). In New York City, a 4% tax rate is imposed on partnerships, LLCs and other unincorporated businesses such as sole proprietors. Exemptions are given to those who buy, sell, hold, lease and manage a property for their own account; sales representatives; and state-regulated unincorporated utilities that are imposed with the city tax on utilities (brokers/dealers are not eligible for the exemption).
According to the Albany Business Review, New York State used to impose a UBT on businesses but that was done away with in 1982. Another problem, the report said, is the complexity of determining the amount to be taxed on flow-through entity partners and shareholders and tracking income between different levels of partners and the administrative headaches involved for both the agency and the businesses.
The other option is to impose a flat tax on the gross receipts of flow-through entities. It is similar to the filing fees paid by LLCs that are considered “disregarded entities” for federal tax purposes. The filing fee is also applied to regular partnerships with at least $1 million in gross income earned in New York last year, as well as domestic and foreign LLCs and LLPs; these entities are responsible for filing a New York State partnership return for any New York-based income, losses, gains and deductions.
The flat fee for entities and regular partnerships can range anywhere from $25 for New York-sourced gross income of up to $100,000 to $4,500 for incomes more than $25 million. Regular partnerships with incomes up to $5 million will pay a $1,500 fee. Like the NYC UBT, the tax is remitted four times a year, but the advantage of this tax scheme, the report said, is that there are fewer “administrative burdens” associated with the flat fee. Under this proposal, the tax could be raised “to provide a desired level of revenue,” and sole proprietors and single-member LLCs would be exempt.
The Tax Department made these suggestions to help Governor Cuomo work around the $10,000 state and local tax deduction cap. However, representatives from the Empire Center for Public Policy and The Business Council of New York State Inc. have expressed opposition to this plan, stating it will give the state more power to spend and, therefore, more power to raise taxes to continue its spending, according to the Albany Business Review article.
When starting a business, one of the most important decisions you will need to make is in choosing the type of legal entity that will be best for the growth and success of the endeavor, while considering the tax consequences each entity provides, based on your individual circumstances.
If you are starting a new business, or if you already own a business and would like to stay current on the latest business tax laws, the advice and counsel of an experienced business law attorney is often vital. Contact the experienced attorneys at Blodnick, Fazio & Associates, P.C. for a free consultation by calling (516) 280-7105.