PwC alternatives alert, April 2, 2009

Proposed carried interest legislation removed from New York State budget bill

On March 28, 2009, a revised New York State budget bill was introduced that will have a major impact on the investment management and real estate industry. The most important change is that carried interest legislation, which was going to tax the carry for New York State nonresidents, has been removed in its entirety.

Below are some of the other important aspects of the budget, including substantially higher personal income tax rates for high income taxpayers, elimination of itemized deductions (except charitable contributions) for taxpayers earning more than $1 million and a nonresident FRPTA (Foreign Investment Real Property Transfer Act) tax on sale of partnership, LLC and C Corp interests (with less than 100 shareholders).

Personal income tax rates (Part Z-1): The legislation would increase tax rates, for tax years beginning after 2008 and before 2012 for the following groups:

For unmarried individuals; married individuals filing separately and estates and trusts the tax rates will be:

Taxable income over $200,000 but not over $500,000 would be taxed at 7.58% (plus $19,756)
Taxable income over $500,000 would be taxed at 8.97% (plus $35,456)

For married individuals filing joint returns and surviving spouses the tax rate will be:

Taxable income over $300,000 but not over $500,000 would be taxed at 7.58% (plus $19,756)
Taxable income over $500,000 would be taxed at 8.97% (plus $35,456)

For heads of household the tax rates will be:

Taxable income over $250,000 but not over $500,000 would be taxed at 7.58% (plus $19,756)
Taxable income over $500,000 would be taxed at 8.97% (plus $35,456)

Sale of partnership/LLC/corporate interest with real property located in New York State (Part F-1)

Nonresidents are subject to tax on items of income attributable to the ownership of any interest in real or tangible personal property in the state. Under the legislation, real property located in the state would include an interest in a partnership, LLC, S corporation, or non-publicly traded C corporation with not more than 100 shareholders that owns real property located in the state and that has a fair market value that is at least 50% of all the assets of the entity on the date of sale of the taxpayer's interest in the entity. The gain or loss derived from New York sources from the taxpayer's sale of an interest in an entity would equal the total gain or loss reported for federal income tax purposes multiplied by a fraction, the numerator of which is the fair market value of the real property located in the state on the date of the sale, and the denominator of which is the fair market value of all of the entity's property on that date. Only those assets that the entity owned for at least two years before the date of the sale or exchange are used in determining the value of all the assets of the entity on the date of the sale or exchange. This amendment would take effect upon enactment.

Itemized deductions (Part W-1)

The proposed legislation would limit the itemized deduction of individuals with New York State or New York City adjusted gross income over $1 million. The itemized deduction would be limited to 50% of the deduction (excluding charitable contributions). In determining the installment payment of estimated tax for 2009, the computation of 100% of the tax for the preceding year would have to be made as if the itemized deduction for 2008 had been limited.

Estimated payments (Part G-1)

The legislation would increase the amount of the first corporate franchise tax estimated tax installment payment to 40% from 30%, for taxpayers whose preceding year liability was in excess of $100,000, applicable to tax years beginning on or after January 1, 2010.

LLC fee extended to partnerships (Part H-1)

The legislation would subject all partnerships to the annual filing fee currently imposed on limited liability companies and limited liability partnerships (partnerships that are not LLPs and that have New York source income of less than $1 million would be exempt), applicable to tax years beginning on or after January 1, 2009.

For additional information, please contact your PwC engagement team or any of the partners in our practice.