Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)
In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.
3. New York State/City:
You can have an S-Corp for federal and New York State tax purposes, but New York City will disregard your S-Corp tax status and treat it as a C-Corp, a regular corporation. That means your S-Corp owes NYC General Corporation Tax (GCT) of 8.85% on net income.
First, reduce net income with deductions for officer compensation and employee benefit plans. If your income is over $200,000, you may trigger “alternative tax,” which requires adding back officer compensation for an alternative GCT calculation. If you trade significant capital with great success, you may need higher officer compensation to get close to breaking even on the NYC corporation tax return. Higher compensation means higher payroll taxes, but it avoids NYC GCT.
- New York State/City Minimum Tax: There is an NYS S-Corp “fixed dollar minimum tax” based on NYS receipts, which includes trading gains. NYS lowered this minimum tax over the past few years. Currently, it is only $25 if receipts are not more than $100,000, $50 if not more than $250,000, $175 if not more than $500,000 and it rises from there. New York City has a similar fixed dollar minimum tax regime.
- New York City: 4% Unincorporated Business Tax (UBT) applies on unincorporated businesses including LLCs filing partnership returns, general partnerships, and sole proprietorships. NYC exempts a trading company from UBT, providing the company does not have any business income like brokerage commissions, or asset management fees. The company must solely derive its revenue from portfolio income, including capital gains.
Many investment managers and private equity managers use two management companies in NYC to reduce UBT. An LLC or S-Corp for receiving management fees, subject to UBT or GCT. And, an LLC filing a partnership return for receiving capital gains and portfolio income from the underlying hedge fund or private equity fund as profit allocation, otherwise referred to as “carried interest.”
On Feb. 4, 2016, NYC submitted a resolution to “eliminate the exemption of private investment fund carried interest from the New York City unincorporated business tax.” Minutes of the Stated Meeting Feb. 24, 2016, state: “Resolved, That the Council of the City of New York, calls upon the President of the United States to close the federal carried interest tax loophole using executive action.” In other words, NYC did not repeal carried interest. NYC proposed similar repeal in 2012 but did not enact repeal at that time, either.
NYS and NYC have progressive individual income tax systems. The top NYS rate is 8.82% on income over $2,125,450. The top NYC resident rate is 3.876% on income over $500,000. An NYC resident has a combined top rate of 12.7%.
NYS has an estate tax rate up to 16% and an exemption of 3.125M, which is below the federal exemption of $5.450M for 2016.
Many traders working for banks and hedge funds work and live in NYS/C, but online traders often move to a tax-free state like Florida to avoid high state/city taxes on S-Corps, individual income, and estates. It is not easy to change your tax residence away from NYS/C. Read my blog post: Bill de Blasio’s tax-the-rich plan.
Florida does not tax S-Corps, or LLC’s filing as a partnership unless the LLC has a corporate owner. FL does tax corporations, see Florida’s Corporate Income Tax.
FL does not have an individual income tax system.
FL does not have an estate or inheritance tax regime.
With no state tax on S-Corps, individuals or estates, FL is one of the best tax states for online traders.
Learn the rules for establishing residency in Flordia. Read Florida Residency.
Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.