Partnerships in New York are subject to both state and federal tax rules, but they benefit from certain pass-through taxation features. This means that, generally, the income generated by a partnership is not taxed at the partnership level. Instead, the income “flows through” to the individual partners, who report it on their personal income tax returns. However, there are some nuances to understand about how partnerships are taxed in New York State.
Federal Taxation of Partnerships
At the federal level, partnerships are pass-through entities. This means that the partnership itself does not pay federal income taxes. Instead, the profits and losses of the partnership are divided among the partners, and each partner reports their share of the partnership’s income or loss on their personal tax returns. The partnership files an information return (Form 1065) with the IRS, which details the partnership’s income, deductions, and allocation of profits.
New York State Taxation of Partnerships
- Pass-Through Entity: Just like federal tax law, New York State treats partnerships as pass-through entities. The income from the partnership is passed through to individual partners, who are responsible for reporting their share of the income on their New York State income tax returns.
- Partnership Filing Requirements: Although the partnership itself does not pay income taxes, it must file an annual Form IT-204 (Partnership Return) with the New York State Department of Taxation and Finance. This form reports the partnership’s income, deductions, and other relevant information.
- Partnerships With Nonresident Partners: If a partnership has partners who are nonresidents of New York, the partnership may be required to file Form IT-204-CP (Partnership Nonresident Income Allocation and Tax Credit) to allocate income earned in New York to nonresident partners and to withhold state taxes on their behalf.
Tax Rates for Partnerships
- Personal Income Tax: Partners are taxed on their share of the partnership’s income at the individual New York State income tax rates, which range from 4% to 10.9% depending on their income level. New York City residents also pay local income taxes in addition to the state taxes.
- Alternative Minimum Tax (AMT): New York State has an Alternative Minimum Tax (AMT), but this tax is generally more relevant for corporations rather than individual partners in a partnership.
- Sales Tax: If the partnership is involved in selling goods or services in New York, it may be subject to New York State sales tax. Partnerships must collect and remit sales tax on taxable transactions.
- Employment Taxes: If the partnership has employees, it must also comply with New York State’s employment tax requirements, including withholding state income tax from employee wages and paying unemployment insurance.
Partnerships Doing Business in New York
If a partnership is considered to be doing business in New York State (i.e., it has a significant presence or generates income from activities in the state), it may be subject to the New York State franchise tax. This tax is based on the partnership’s gross income, and certain partnerships may qualify for exemptions or special tax treatment depending on their activities.
Tax Considerations for Partners
- Nonresident Partners: Nonresident partners of a New York-based partnership are taxed on the income they earn in New York. New York State requires partnerships to withhold state income tax on the distributive share of income for nonresident partners.
- New York City Taxes: In addition to New York State taxes, partnerships with business operations or individual partners in New York City may be subject to the city’s business taxes, such as the Unincorporated Business Tax (UBT), which applies to partnerships and other unincorporated businesses operating in the city.
Conclusion
In New York, partnerships are generally taxed as pass-through entities, meaning the partnership itself does not pay taxes on its income. Instead, the partners are taxed individually on their share of the partnership’s income. However, partnerships must comply with various filing requirements, including submitting forms to report income and withholding taxes for nonresident partners. Additionally, partnerships may be subject to other taxes depending on their business activities in New York, including sales tax and franchise tax.
