Key Takeaways:

  • NYS Franchise Tax applies to corporations operating in New York, with specific rules for S-Corps.

  • S-Corps benefit from pass-through taxation but must adhere to strict compliance with state election forms and tax filings.

  • Different tax bases apply, such as the Fixed Dollar Minimum (FDM), Entire Net Income (ENI), and Business Capital.

  • Shareholders, including nonresidents, are taxed on income derived from New York sources.

  • Understanding additional rules, such as the Metropolitan Transportation Business Tax (MTA Surcharge) and tax credits, ensures compliance.

Understanding NYS franchise tax S-corp is important if you are a member of an S-corp. To ensure your business is paying the proper amount due in taxes, it is important to understand the tax state laws in the state in which your business was formed. These taxes, typically referred to as corporate income taxes, will vary from state to state. In New York, the rules can be somewhat complex.

In New York, corporate income tax is referred to as a corporation franchise tax when referring to New York C-corporations and S-corporations. When referencing limited liability companies, general and limited liability partnerships, the tax is referred to as a filing fee.

When operating as a C-corporation in the state of New York, a corporation's franchise tax is the higher of the Maximum Taxable Income, MTI, the Fixed Dollar Minimum, FDM, the Business and Investment Capital, or the corporation's Entire Net Income, ENI.

What Is FDM Tax Based On?

For S-corporations, the FDM tax is based on the corporation's New York State receipts and is as follows:

  • $25 – Receipts not exceeding $100,000
  • $50 – Receipts exceeding $100,000 but not more than $250,000
  • $175 – Receipts exceeding $250,000 but not more than $500,000
  • $300 – Receipts exceeding $500,000 but not more than $1,000,000
  • $1,000 – Receipts exceeding $1,000,000 but not more than $5,000,000
  • $3,000 - Receipts exceeding $5,000,000 but not more than $25,000,000
  • $4,500 - Receipts exceeding $25,000,000

Metropolitan Transportation Business Tax Surcharge

The Metropolitan Transportation Business Tax (MTA surcharge) applies to corporations conducting business within the Metropolitan Commuter Transportation District (MCTD), which encompasses New York City and surrounding counties. Although S-corporations are generally exempt from this surcharge, other businesses, such as traditional C-corporations, are liable. The surcharge rate is calculated as a percentage of the corporation's franchise tax. Companies that own property, employ workers, or generate income in this area should carefully assess their MCTD exposure.

How Does ENI Tax Rate Vary?

The corporation's ENI tax rate will depend on the amount of the corporation's federal taxable income. Generally, corporations operating in New York incur a tax rate of 6.5 percent if their federal taxable income is $290,000 or less. This is with the exception of a few New York manufactures that have qualified for a flat 6.5 percent rate regardless. For corporations exceeding the $290,000 limit, the tax rate is 7.1 cents on each dollar up to $390,000, then the rate is 4.35 percent for each dollar in excess of $390,000.

Additional Tax Credits and Deductions

New York State provides tax credits and deductions to eligible corporations, including S-corporations, to incentivize certain activities. Notable credits include:

  • Investment Tax Credit (ITC): For investments in machinery and equipment used in manufacturing or research.

  • Excelsior Jobs Program Tax Credit: For businesses expanding employment opportunities in targeted industries.

  • Real Property Tax Credit: For small businesses renting or owning property within the state.

By leveraging these credits, S-corporations can potentially reduce their tax liability, promoting growth and investment.

Why Do Corporations Want to Become an S-Corp?

Usually, when a traditional corporation forms and then later requests the state to recognize their corporation as an S-corporation, they are simply requesting S status with the IRS. This allows the corporation to be exempt from paying a separate federal income tax. S status enables the corporation's taxable income to pass through to its shareholders, and then shareholders are subject to taxation on their shares of the corporation's income.

State Election Requirements for S-Corporations

To qualify as an S-corporation in New York, a corporation must submit a separate state election form, even if it has already elected S-corporation status federally. The CT-6 Form, Election by a Federal S Corporation to be Treated as a New York S Corporation, must be filed within 75 days of the beginning of the tax year. Failure to file on time may result in the corporation being taxed as a traditional C-corporation. Shareholders should ensure their pro rata share of income and losses is accurately reported on their state tax returns to avoid penalties.

How Do Nonresident Shareholders Pay Taxes?

If you are a nonresident shareholder or a part-year resident shareholder, you will only pay tax on the S corporation's items that are derived from New York sources. This determination will be made at the corporate level. There is a special form to be filed with the IRS to elect S status; however, New York does not recognize the federal S election unless a New York election form is filed as well.

Multi-State Apportionment Rules

Nonresident shareholders of S-corporations with operations in multiple states need to adhere to apportionment rules to determine the New York source income subject to taxation. Apportionment factors include the proportion of sales, payroll, and property located in New York relative to other states. These calculations ensure nonresidents pay tax only on their share of income attributable to New York, aligning with the state’s fair taxation principles.

What Happens When an Entity Doesn't Form as an S-Corp?

Failing to file the New York election form for S status with the state will mean the corporation will be taxed as though it is a traditional corporation. This means that tax credits are applied to the corporation's tax liability and the tax does not pass through to shareholders, thus residents must pay tax on the actual distributions of cash or property, rather than on their pro rata share of the pass-through items.

Non-resident shareholders do not pay on the actual distributions of cash or property, nor are they required to pay tax on their pro rata share of the S-corporations pass-through items.

If an S-corporation is not able to meet the filing deadline, they may request a six-month extension to file the franchise tax return. The extension request is made by filing, Request for Six-Month Extension to File New York S Corporation Franchise Tax Return, Form CT-5.4. You must pay the estimated franchise tax on or before the due date of the return.

When a partnership is conducting its business, employs some type of capital, owns or leases its property, or maintains an office within the state, this means it and any of its partners will be liable for NYS franchise S-corp tax.

Late Filing and Extension Policies

If an S-corporation anticipates missing its filing deadline, it can request an automatic six-month extension by filing Form CT-5.4. This extension applies only if the estimated franchise tax is paid by the original deadline. Businesses should document reasons for delays and ensure all outstanding taxes are paid promptly to avoid interest charges or penalties.

FAQ Section

What is the NYS Franchise Tax for S-Corps?

It is a tax on New York-based S-corporations, calculated primarily on the Fixed Dollar Minimum based on receipts within the state.

Are nonresident shareholders taxed on all S-Corp income?

No, they are taxed only on the income derived from New York sources.

How do businesses calculate the Metropolitan Transportation Business Tax (MTA Surcharge)?

The surcharge is a percentage of the franchise tax for corporations operating in the MCTD region, but it does not apply to S-corporations.

Can S-Corporations qualify for tax credits in New York?

Yes, they may qualify for various credits such as the Investment Tax Credit, Real Property Tax Credit, and Excelsior Jobs Program Tax Credit.

What happens if the NY S-Corp election is filed late?

Without timely filing of Form CT-6, the corporation may be taxed as a C-corporation, subject to traditional corporate tax rules.

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