State & Local Tax Bulletin (August 2003)
Prompt Action Required to
Avoid Overwithholding for
New York Nonresident Partners
Richman, formerly a tax associate in our
New York office.
Wainwright, tax partners in the firm's New York and
Palo Alto offices, provided comments on this article.
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Prompt action is required to qualify for relief from a double New York State withholding problem created for many partners and shareholders of partnerships and Subchapter S corporations with a New York office or otherwise conducting business in New York.
Effective May 15, 2003, New York tax law was amended to impose a new withholding requirement on any entity with New York source income that is treated as a partnership for federal tax purposes (including a limited liability company that does not elect to be treated as a corporation) and a corporation treated as an S corporation for New York tax purposes. Prior to the change in law, a partnership or S corporation was required to withhold and deposit estimated New York taxes with respect only to any nonresident partner or shareholder joining in an authorized nonresident New York "group" return of the partnership or S corporation. The change in law now requires a partnership or S corporation to withhold and deposit estimated New York taxes on behalf of any nonresident individual or C corporation partner who does not join in such a group return as well.
Beginning on September 15 of this year, all affected partnerships and S corporations are required to make these estimated withholding deposits on April 15, June 15, September 15 and January 15 (for the periods ending March 31, May 31, August 31 and December 31) of each applicable year. For 2003, the first estimated tax deposit is due on September 15 and must include the estimated tax that would have been due on April 15 and June 15, 2003; that is, it must be made for the entire period January 1 through August 31, 2003. Normally, the amount to be deposited must be determined without regard to any estimated tax payments that the partner may have made (and affected partners should adjust their individual New York estimated tax payments accordingly).
Because of the May 2003 enactment date for the law change, however, many nonresident taxpayers have already made April 15, 2003 and June 15, 2003 estimated tax payments. The instructions to the just released NY Form IT-2658 provide a one-time exception, applicable only for 2003, allowing an affected nonresident partner or shareholder to limit the September withholding by the partnership or S corporation to only the normal September 15 quarterly amount (that is, for just the period June 1 through August 31, 2003) by furnishing the partnership or S corporation with written notification that the partner or shareholder has complied with the New York estimated tax rules for the periods covered by the April 15 and June 15 payments.
In the absence of this notice the partner or S corporation shareholder faces a potential doubling up of New York estimated tax payments with respect to New York source income from the partnership or S corporation for the periods January 1 through March 31, 2003, and April 1 through May 31, 2003. Furnishing the notice to the partnership or S corporation avoids a second withholding with respect to the earlier periods and also limits the total estimated taxes for those earlier periods to the potentially lesser amount that the individual estimated tax rules may permit.
To be effective, the notice should be given by the partner or shareholder before the partnership or S corporation makes the September 15th estimated tax payment.
The New York estimated tax rules for partnerships and S corporations, unlike for individuals, do not permit the annualization of income exception to the application of the penalty for failure to pay estimated taxes. Nonresident partners and S corporation shareholders who based earlier payments of New York estimated taxes on the annualization method should review those calculations taking into account amounts withheld and paid over to New York as estimated taxes by the partnership or S corporation, as those partners or shareholders may still need to make additional estimated tax payments to New York on September 15, 2003 or January 15, 2004 to ensure that the annualization exception continues to apply.
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