The current pandemic has changed the working landscape for commuters everywhere and their employers. This is especially true in New York City, which became the epicenter for the crisis and poster child for the telecommuting work force. Now more than ever, individuals who used to travel into the City for work are logging in remotely from home, delivering their services miles away from their Manhattan offices. This has created interesting personal income tax questions, and as we will discuss below, potential saving opportunities for professional service companies subject to the NYC Unincorporated Business Tax (UBT).
For New York personal income tax purposes, where an individual chooses to work from has little consequence on the taxation of compensation earned. For residents, this is simply because all income earned by the individual is taxable by the resident state and/or city. For non-residents (who can only be taxed on New York sourced income) this is because of New York's "convenience of the employer" rule. This rule treats an employee's compensation earned while telecommuting as if it were earned at the employer's office location, to the extent that the employee is working remotely for her own convenience. We've been all over this issue, and have a blog post that we're constantly updating as states address how they will apply these concepts to Covid-19 telecommuters.
But the convenience rule is limited, as of now, to personal income tax. It does not apply to business taxes. For purposes of determining the source of business receipts for New York City's UBT, for example, the reason for the individuals' remote work is irrelevant. Rather, NYC Admin Code 11-508(c)(3)(C) sources service receipts for the UBT to the location where the services were performed. And because there is no convenience rule under these sourcing provisions, it would appear that the apportionment should be based on where the telecommuters are located.
This could be a real game changer for New York City based professional service companies, such as hedge funds which are structured as partnerships, LLCs, or sole proprietorships subject to the UBT. For example, prior to the stay-at-home orders, if a hedge fund had 10 employees, and they all worked from the fund's NYC office, all income generated from the performance of those services would be sourced to NYC for UBT purposes. However if the same employees were instead telecommuting – four from their apartments in Manhattan, and six from their homes in CT – presumably only 40% of the income generated from those services would be sourced to NYC under current NYC rules, proportionately reducing their UBT tax liability.
So as you can see, these businesses may now experience an unprecedented and significant drop in their NYC apportionment and consequently their UBT bill. And to be clear, the same type of example could be applied to law firms, accounting firms, etc. who pay significant UBT every year.
Bringing this within the scope of our new reality, consider that for the first few months of the pandemic employees were forced to work at home. Yet even now as the restrictions lift, we are seeing many employers telling their employees to continue working remotely. Obviously, employers are taking these measures for health-related reasons, but is there a tax benefit as well? Depending on the state's take on the convenience rule, there may not be a benefit for individuals and their personal income taxes, but there can certainly be a meaningful benefit for UBT taxpayers.
However, proving the location of an employee on audit will likely be challenging and will require comprehensive records, including attendance records and software products like MONAEO. Which is why now is the right time for these businesses to take an inventory of personnel and their locations and consider the tax savings and cost of compliance moving forward.
So overall, while the jury is still out in New York as to whether "convenience" includes work from home due to stay-at-home orders, from our government or otherwise, any interpretation should be confined to the personal income tax space. That said, New York City's current fiscal position has it up against the ropes and as we have found, has made them even more aggressive than usual. So as with everything else these days, the future will bring with it a lot of uncertainty.
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