What is the NY New Rule for Business Taxes and Changes to LLC and Corporate Taxation

New York has introduced a significant change to its business tax laws, affecting how LLCs and corporations are taxed. This new rule is a major shift from the previous system.

The state now allows LLCs to elect to be taxed as corporations, which can provide tax savings for some businesses. This change is expected to benefit many small businesses and entrepreneurs.

One key aspect of the new rule is that it eliminates the requirement for LLCs to pay a 7.25% franchise tax on their gross income. This can result in substantial tax savings for eligible businesses.

Businesses that qualify for this change will need to file a new form, the IT-3, to make the election.

A fresh viewpoint: Tax Secrets of Health Savings Accounts

The new business tax rules in New York are a bit of a headache, but don't worry, we've got the lowdown.

The state's tax authority has introduced a new rule that requires businesses to file their tax returns electronically, starting from 2023. This means no more paper forms!

Businesses with annual gross income of $10 million or more will need to file their tax returns on the state's online portal, which is expected to be more efficient and secure.

You might enjoy: Taxes on Sale of Business S Corp

If you're an S Corporation electing into the PTET, you'll need to make estimated tax payments based on the old allocation rules for the June 15 payment, but then you'll have to make a "true-up" payment by September 15.

S Corporations electing into the PTET will have to make a "true-up" payment by September 15 to ensure that 75% of their projected liability under the new resident shareholder rules has been remitted to the state.

New York City has its own PTET program, available to partnerships and S corporations with all shareholders as residents of New York City.

The NYC PTET tax rate is 3.876%, and it's in addition to all other current taxes, including the Unincorporated Business Tax and the General Corporation Tax.

An annual election must be made by March 15 of the tax year at issue to participate in the NYC PTET program.

Quarterly estimated payments are required, with the first one being due on March 15 of the subject tax year.

New York City residents of electing entities are entitled to a credit against their city personal income tax liability, which is added back in computing the individual's state income.

You might enjoy: Llc vs Corporation

If you're starting a new business in New York, it's essential to understand the industry taxes you'll need to pay. Cigarettes and tobacco products are subject to an additional tax.

Some industries are required to pay a specific tax, such as adult-use cannabis products. This tax is in addition to any other taxes they may be required to pay.

If your business involves beverage container deposits, you'll need to pay a tax on those. Authorized combative sports tax is another tax that some industries must pay.

Alcoholic beverages are also subject to an additional tax. If your business involves wireless communications, you'll need to pay a surcharge.

Waste tire management fee is a tax that some industries must pay. Taxicab and hail vehicles are also subject to an additional tax.

Manufactured home parks registration is a tax that some industries must pay. Mortgage recording tax is another tax that's required for certain industries.

Opioid excise tax is a tax that some industries must pay. Paper carryout bag reduction fee is another tax that's required for certain industries.

Here are some industries that are subject to additional taxes in New York:

You'll need to stay on top of the sales tax rate in New York, which is 4% as the base rate. Cities, counties, and school districts can add their own rates on top of that.

If you want to know your local sales tax rate, check out the New York State Department of Taxation and Finance website.

Worth a look: Top 10 Core Banking Solutions

LLCs taxed as S-corp can make distributions to their members without being subject to the 15.3% self-employment tax, making it attractive to investors.

S-corps are taxed as pass-through entities, similar to LLCs with default tax status, but have some important differences, such as not requiring a federal corporate tax.

Some LLCs elect S-corp tax status by filing Form 2553 with the IRS, but it's best to consult a CPA to ensure meeting IRS and state requirements.

Expand your knowledge: Irs Mailing Address for Business Taxes

LLCs taxed as C-corp, on the other hand, are eligible for greater tax deductions, but must pay the 21% federal corporate income tax and New York's corporate tax, making it a less common choice.

C-corps file Form 1120 with the IRS, and very few LLCs elect this status due to the additional tax burden.

A fresh viewpoint: Corporate Private Equity

LLCs can elect to be taxed as a C-corp, which is the default tax status for corporations. This option can be attractive to some LLCs because C-corps are often eligible for greater tax deductions than pass-through LLCs.

C-corps must pay the 21% federal corporate income tax and New York's corporate tax. This can be a significant expense for businesses, but it may be worth it for those who qualify.

To file as a C-corp, an LLC must file Form 1120 with the IRS. A CPA can help determine if this option makes sense for your business.

C-corps are often eligible for greater tax deductions than pass-through LLCs, which can save your business some money. However, very few LLCs make the choice to elect C-corp status.

You might like: Corporate Income Tax Usa

The corporate tax rate in New York has undergone some significant changes in recent years. The FY 22 budget increased the corporate franchise tax rate to 7.25% for tax years beginning on or after January 1, 2021 and before January 1, 2024, for taxpayers with a business income base greater than $5 million.

This rate is scheduled to be extended for another three years to tax years ending before January 1, 2027, under the current FY 24 proposed budget legislation. The 7.25% rate would be extended for another three years, just like the current 0.1875% capital base tax rate.

The capital base tax rate was initially set to be 0% starting in 2021, but the FY 22 budget imposed the tax at the rate of 0.1875% for tax years beginning on or after January 1, 2021 and before January 1, 2024. This rate will also be extended for three years, through tax years ending before January 1, 2027.

It's worth noting that the delay in the phase-out of the capital base tax did not apply to deemed small businesses.

Here's an interesting read: How to Find Growth Rate of Company

You're likely wondering what other tax considerations come into play when forming an LLC. LLCs are pass-through entities, which means they're not taxed at the business level.

The IRS considers an LLC to be a disregarded entity for tax purposes, unless it's elected to be taxed as a corporation. This can be a complex decision, but it's worth considering if you're unsure about the tax implications of your LLC.

As a result, LLC owners must report their share of business income and expenses on their personal tax returns. This can be a bit of a headache, but it's a crucial part of being an LLC owner.

LLCs can also be subject to self-employment taxes, which can be a significant expense for solo owners. This is because LLC owners are considered self-employed and must pay self-employment taxes on their business income.

Take a look at this: Llc Taxed

To register for a New York State sales tax permit, you'll need to fill out an online application, which is called a "Certificate of Authority" in New York.

This registration is necessary to start legally charging sales tax, and it will assign you a filing frequency based on the amount of taxable sales or the amount of tax due, which can be monthly, quarterly, or annually.

You'll be automatically switched to monthly filings if your filed sales exceed $500K, and the due date for filing is typically the 20th of the month following the reporting period, unless weekends or holidays push that date back.

To file your sales tax, you'll need to use the ST-809 form for the first two months and the ST-810 form for the third month, or the ST-810 form if you're a quarterly filer.

You might like: How to File Small Business Federal Taxes

As an employer in New York State, you're required to pay unemployment insurance taxes, with rates ranging from 2.025% to 9.825%. New employers will need to pay a rate of 3.4% for 2022.

You'll need to pay these taxes each quarter, which can add up quickly. It's essential to keep track of your payments to avoid any penalties or fines.

The rate for workers' compensation will vary based on factors like the size of your business and the type of work being performed by employees. For example, an employee who sits at their desk all day will cost less to insure than an employee working on a construction site.

If you can't find workers compensation insurance through a private carrier, the New York State Insurance Fund can guarantee your business coverage.

See what others are reading: Venmo Will I Receive 1099-k for Personal Account

You'll need to file your sales tax returns online at the New York Department of Taxation and Finance. This is a crucial step after collecting sales tax from your customers.

New York assigns a filing frequency based on your business's taxable sales or tax due, which can be monthly, quarterly, or annually. You'll need to file monthly returns on ST-809 for the first two months, and then ST-810 for the third month.

The due date for filing is usually on the 20th of the month following the reporting period, but this can be pushed back if it falls on a weekend or holiday.

A fresh viewpoint: When Are Capital Gains Taxes Due

After registering and collecting sales tax, you'll need to file and pay those collected funds. You can receive a discount of 5%, up to $200 per quarter, for filing on time.

A penalty of $50 plus interest exists for late filings, so it's essential to stay on top of your sales tax obligations.

Expand your knowledge: What Is Sales Tax

Local tax laws can be tricky to navigate, but it's essential to follow them to avoid costly mistakes.

In some municipalities, local taxes are levied on specific goods and services. For instance, New York City charges a 4.5% sales tax on food and beverages sold by restaurants and caterers.

New York City is unique because it also levies a Metropolitan Commuter Transport District tax of 0.375%, bringing the total sales tax rate to 8.875% in this case.

Some services, like tattooing, manicures, and pedicures, are exempt from state sales tax, so you'll only have to pay the city's rate if you get a tattoo in New York City.

It's crucial to follow all local tax laws in the city where your business is located, as well as anywhere else you do business.

Worth a look: Outsourcing Accounting and Bookkeeping Services

New York State sales tax rates vary depending on the city and county where your sale is delivered, ranging from 4% to 8.875%. This means you'll need to update your sales channel settings to collect sales tax accurately.

If you're using a sales tax application like TaxJar or Avalara, you can update your settings through those apps. For instance, TaxJar and Avalara can connect to your sales channel and apply the correct tax rate based on the location of where your product is delivered.

Corporate tax rates in New York are also changing. The FY 22 budget increased the corporate franchise tax rate to 7.25% for tax years beginning on or after January 1, 2021, and before January 1, 2024, for taxpayers with a business income base greater than $5 million.

Here's a quick rundown of the current corporate tax rates:

The revised regulations also include discussions of other apportionment items, such as the sourcing of gains from the sale of certain non-financial intangible assets. This is generally looking to the location where the value of the intangible was accumulated.

The Business Apportionment Factor (BAF) is a crucial concept in tax apportionment. It's used to determine the portion of a business's income that's subject to tax in a particular state.

Receipts for purposes of the receipts factor generally include unusual events. This is a change from previous regulations that would have excluded such events. New York City is currently considering whether to adopt the same approach.

The presumption is that receipts from large quantity transactions (e.g., more than 250 business customers) are sourced to the location of the customer's billing address. However, New York City has expressed its intention to not follow this provision.

The regulations provide clarity on discretionary adjustments to the BAF. This includes the ability to file amended returns or seek further consideration of a prior determination during an audit.

The Metropolitan Commuter Transportation Mobility Tax (MCTMT) is a significant tax in the NYC metropolitan area. It's imposed on employers in the area.

The MCTMT has some changes impacting limited partners. For MCTMT purposes, an individual would not be considered a limited partner if they take part in the control or management of the partnership and are not a passive investor.

The MCTMT rate is increasing. The top rate would jump to 0.5% from 0.34% effective July 1, 2023.

Net earnings from self-employment are also affected. The rate imposed would increase to 0.42% for tax year 2023 and to 0.50% for tax years beginning on or after January 1, 2024.

It's worth noting that tax increases are usually considered in the revenue bill.

Here's an interesting read: Can You Go to Jail for Not Paying Business Taxes