Nonresident shareholders of S corporations doing business in New York might face a higher 2015 tax bill as a result of changes enacted in 2014. The following chart summarizes some of the provisions affecting S corporations in 2015.
|2014 & Prior Years||2015 & Future Years|
|Nexus provisions||Physical presence standard generally applied||Nexus presumed if the S corporation has $1 million or more of New York sales, resulting in a filing obligation for the S corporation and the nonresident shareholders|
|Apportionment factor||Single, sales-only factor||Single, sales-only factor|
|Sourcing of sales other than sales of tangible personal property||Modified cost of performance, which attributes receipts based on the percentage of receipts earned in New York||Market-based sourcing, which attributes receipts to New York if the customer receives the benefit in New York|
The expanded nexus provisions and the changes to the sourcing rules will result in many nonresident S corporations being subject to tax in New York for the first time. Unlike most other states, New York requires Form CT-6, “Election by a Federal S Corporation to Be Treated as a New York S Corporation,” to be filed by March 15 of the first tax year to which the election will apply. For calendar-year taxpayers, failure to make the New York S-corporation election by March 15, 2015, will result in the S corporation being taxed as a C corporation in New York for the 2015 tax year.
An S corporation based outside of New York with significant New York receipts from items other than tangible personal property (such as services and intangible property) could face a significant increase in its nonresident shareholders’ New York tax liability as a result of the new sourcing rules. This increase might need to be accounted for in the estimated payments required for nonresident withholding.
Conversely, nonresident shareholders in New York-based S corporations with receipts from other than tangible personal property sales might see a decrease in their New York tax liability. These shareholders might need to increase their withholding or estimated payments in their resident state to avoid a potential underpayment penalty as a result of the reduction in the credit for taxes paid to New York.
The new corporate tax law changes do not apply to partnerships (including limited liability companies taxed as partnerships). For partnerships there is no bright-line economic nexus standard or fixed-dollar minimum tax, but the three-factor apportionment using modified cost of performance for the sales factor applies.