Inside New York tax reform: Understanding the impact on asset management companies

April 2014


On March 31, 2014, New York Governor Andrew Cuomo signed into law NY S 6359, enacting significant changes to New York State’s corporate tax regime, most of which take effect for the 2015 tax year. Some of the more important changes include: merging the bank franchise tax with the corporate franchise tax, establishing economic nexus provisions, replacing the state’s existing combined reporting provisions with a unitary combined reporting system along with an effectively connected income approach, updating the single receipts factor apportionment formula to permit customer sourcing provisions for all taxpayers, and providing tax breaks to manufacturers. Coupled with these provisions, the corporate rate is reduced from 7.1% to 6.5%, effective January 1, 2016. As noted below, however, the MTA surcharge will greatly increase effective January 1, 2015.

While corporations are less common than pass-through entities in asset management structures, some advisors take the form of S corporations, and many offshore funds take the form of ’blocker corporations’; these entity types are subject to the newly-enacted corporate tax overhaul. In addition, the overhaul further widens the gulf between the corporate provisions and the existing New York State and City individual tax scheme and New York City Unincorporated Business Tax (UBT) scheme in terms of nexus and sourcing rules. Neither tax has been modernized to include economic nexus principles or customer sourcing for all taxpayers, and these taxes loom large in the tax profiles of asset management firms and their founders.

The features of the overhaul most salient to asset managers are economic nexus, customer based sourcing, and the treatment of investment income.

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