Potential New York City UBT Savings As A Result Of Remote Working During Pandemic
Having employees work remotely from homes outside New York City (NYC) as a result of the coronavirus pandemic may result in a reduction of the Business Allocation Percentage (BAP) for a partnership or limited liability company (LLC) for purposes of the NYC Unincorporated Business Tax (UBT), which translates to a lower UBT liability for the partnership or LLC. The financial services industry and professional services firms, in particular, may be able to benefit from this savings opportunity.
General Rule for NYC’s UBT or BAP Apportionment Factor
The UBT is imposed on most unincorporated entities (e.g., partnerships and LLCs that are not treated as a corporate entity for City tax purposes) that engage in a trade or business in NYC; the tax rate is 4% of income allocated to NYC. Fees for services are allocated to NYC if the services are performed in NYC. The UBT apportionment is a single sales factor calculation, with the numerator being receipts for services performed in NYC and the denominator being total receipts for services performed by the entity. This performance location methodology differs from the approach taken by both NYC and New York state with respect to corporations, for which a market-based sourcing methodology is used; under this approach, corporations essentially look at the location where the benefits of the services are received to determine sourcing.
Income Sourcing Rule
Partnerships and other flow-through entities must determine whether or not charges for services are for services performed in NYC. This process normally requires the entity determine where employees and partners/members of the entity physically perform the income-generating services, by taking the following steps:
- Listing each income-producing or revenue-generating services;
- Identifying individuals or groups in the entity that drive the sales of services to clients/customers; and
- Ascertaining the physical work location of individuals who, throughout the tax year, perform the services that generate fees or charges to clients/customers.
If services are performed in more than one location both within and outside of NYC, the taxpayer must calculate the proportion of time spent in NYC. A common approach is to use the payroll of individuals as a proxy to determine the services performed in NYC vs. services performed outside NYC. Costs paid to independent contractors and other third parties may also be considered if they generate revenue. Additionally, depending on the facts and circumstances, the taxpayer may consider weighting individuals differently.
Impact of Remote Workers in the Financial Services Sector
Many companies in the financial services sector can carry out their businesses remotely and likely have employees, partners and others providing such services. Asset managers, in particular, could benefit from a re-evaluation of the BAP during temporary telecommuting as a result of the COVID-19 pandemic and when the pandemic is over. For example:
Pre-COVID-19: Hedge fund (LLP, LLC, or partnership) has 100 employees in NYC generating all of the hedge fund’s income.
Result: Federal taxable income $100,000 x NYC BAP 100% = $100,000 UBT income.
During-COVID-19: 30 of the employees work remotely from their homes outside NYC.
Result: Federal taxable income $100,000 x NYC BAP 70% = $70,000 UBT income.
Tax Savings at 4% UBT Rate = $1,200
It should be noted that the sourcing rules for registered brokers and dealers of securities and commodities differs in that receipts from the services of these businesses must be sourced using the customer’s mailing address. However, applying the BAP rules as indicated above for remote income-generating individuals should yield a reduction in the revenue sourced to NYC for other financial services sectors and, therefore, reduce the UBT liability.
- A business should calculate its 2020 UBT BAP based on its specific facts and circumstances, and this should begin as soon as possible to determine the location of individual income-generators and to gather supporting documentation.
- There may be an opportunity to amend UBT returns for years 2017 through 2019 to align the BAP to the location where services were performed and request a refund since the three-year statute of limitations has not yet expired.
- A large remote workforce could impact the apportionment of income to NYC for UBT purposes. BDO can help taxpayers implement a system to record the location where employees and/or partners/members carry out services to determine the apportionment factors and reassess any changes to those factors.
- With NYC likely losing a substantial amount of revenue from the UBT, it is possible that NYC may decide to release guidance that eliminates the potential for a lower UBT liability or to amend the rules through audit application, administration, or legislation. Affected taxpayers should take this possibility into account.
- With respect to the potential for creation of nexus and/or increased tax liability in other states, some states (e.g., Massachusetts, New Jersey, and Pennsylvania) have issued guidance that shields companies from creating nexus when they have employees working remotely as a result of COVID-19; other states have not issued any guidance and in these cases, the existing statutory and regulatory framework on nexus should be considered because of the potential for tax exposure.