2015 legislation resulted in significant changes for many New York corporate taxpayers. The New York State Department of Taxation and Finance recently issued a technical memorandum that clarifies the impact of the legislation on New York S corporations and their nonresident shareholders.
Before the 2015 tax reform, business income of S corporations was allocated using the business allocation percentage, and investment income was allocated using the investment allocation percentage. The business allocation percentage was based on a single-sales factor for most taxpayers. For service providers, sales were sourced to New York based on cost of performance.
For tax years beginning on or after Jan. 1, 2015, all S-corporation income is allocated using the business apportionment factor. Under the new rules a single-factor sales apportionment method is used. For service providers, market sourcing is used to determine the receipts factor in lieu of the historic cost of performance method. Under market sourcing, receipts are assigned to the location at which the customer receives the benefit of the services.
The difference between the apportionment provisions relating to S corporations and other pass-through entities, such as partnerships (which use three-factor apportionment and cost of performance for the receipts factor), is significant and could result in vastly differing New York tax liabilities for partnerships and S corporations in similar businesses.
Nonresident shareholders of New York S corporations should consider how the changes will affect their New York liability and ultimately their tax liability in their home state if they are entitled to a credit for taxes paid to New York.