The New York State Department of Taxation and Finance has issued guidance regarding the impact of the recent corporate tax reform legislation on S corporations and their nonresident and part-year resident shareholders. Technical Memorandum, “Impact of New York State Corporate Tax Reform on New York S Corporations and their Nonresident and Part-Year Resident Shareholders,” TSB-M-15(7)C, (6)I (N.Y.S. Dep’t of Taxation & Fin., Dec. 1, 2015).

In order to obtain New York S corporation pass-through treatment, all of an S corporation’s shareholders, including nonresidents, must consent to be taxed on their New York source income from the S corporation. As a result, all of the New York S corporation’s apportioned income earned by nonresident shareholders is subject to New York State personal income tax under Article 22. Pursuant to Tax Law § 631, nonresident shareholders must include in their New York source income their pro rata share of the S corporation’s income, loss, and deductions that are derived or connected with New York sources as determined under Tax Law § 632. Tax Law § 632 provides, in turn, that nonresident shareholders in a New York S corporation determine their New York source income from the S corporation using the allocation rules under Article 9-A, even if those items are not included in a corporation’s entire net income under Article 9-A.

Under the recent corporate tax reform legislation (Part A of Chapter 59 of the Laws of 2014 and Part T of Chapter 59 of the Laws of 2015), the Article 9-A apportionment rules were substantially amended. Whereas under the previous rules an Article 9-A taxpayer’s business income was apportioned using its business allocation percentage. and its investment income was apportioned using its investment allocation percentage, under the new law all of an Article 9-A taxpayer’s income is apportioned to New York using its business apportionment factor, which reflects a corporation’s New York State market-based receipts. Tax Law § 210-A. Qualifying investment income and so-called “other exempt income” are now exempt from tax under Article 9-A, and there is no longer an investment allocation percentage.

As a result of these changes, for tax years beginning on or after January 1, 2015, the Technical Memorandum provides that for New York S corporations, all of a nonresident shareholder’s share of S corporation items must be sourced to New York using the New York S corporation’s business apportionment factor, regardless of whether a portion of those S corporation items are treated as exempt investment income or “other exempt income” for Article 9-A purposes. This is the result because there is no exemption for investment income or “other exempt income” under the personal income tax, and the electing shareholders of a New York S corporation are considered to have affirmatively consented to being taxed on such income.