NYS Increases Taxes on Hedge and PE Managers

New York is known to impose all types of strange and untraditional taxes in an effort to increase the state’s tax revenue. One such tax that does not get much consideration is the Metropolitan Commuter Transportation Mobility Tax (MCTMT). However, that is now changing due to some new provisions buried within the state’s recently passed 2024 fiscal year budget.

What is the MCTMT?

New York’s MCTMT is imposed on certain employers and self-employed individuals engaging in business within the Metropolitan Commuter Transportation District (MCTD). The tax applies when employers are (a) required to withhold New York income taxes from employee wages, and (b) the employer’s payroll expenses within the MCTD exceeds $312,500 in any calendar quarter.

What is the MCTMT rate?

The 2024 fiscal year budget divided the MCTMT rate into two zones: (1) the counties of Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess and Westchester, and (2) the five boroughs. The tax rate for the counties surrounding New York City is, and remains at, 0.34% for quarterly payrolls over $437,500. However, as of July 1, 2023, the budget dictates an increase in the MCTMT for New York City employers to 0.6% for those with a quarterly payroll expense above $437,500. Self-employed individuals in New York City will experience an incremental increase from 0.34% to 0.47% through the remainder of calendar year 2023 and then see another increase to 0.6% as of January 1, 2024.

Are limited partners considered self-employed for purposes of the MCTMT?

The New York tax law borrows its definition of partners and self-employed individuals subject to the MCTMT from the Internal Revenue Code’s reference to “net earnings from self-employment.” However, the federal law carves out those amounts earned by limited partners from net earnings from self-employment taxes. Following that exemption through means that limited partners are exempt from the MCTMT. Historically, New York has conformed to this definition and not levied the MCTMT on limited partners.

How did the 2024 budget change the applicability of the MCTMT?

New York’s new budget changed the definition of a limited partner to ensure that limited partners who are actively engaged in the operations of a partnership within the MCTD are subject to the MCTMT. As per the budget, one is not deemed “a limited partner if the individual, directly or indirectly, takes part in the control, or participates in the management or operations of the partnership such that the individual is not a passive investor.”

Who is most at risk under this new definition of a limited partner?

Those that need to be most aware of this change are private equity and hedge fund managers who often earn management fees via limited partnership structures. While previously exempt from New York’s MCTMT, the changes beginning as of July 1, 2023 will likely create tax exposure for them.

With New York projected to have budget shortfalls in the upcoming years, the state will undoubtedly increase its efforts to rein in as much tax revenue as possible. By expanding the MCTMT base, Albany is sending a message that it intends to maximize the wide array of taxes already on the books while narrowing the ability to plan around them. If you have questions regarding the applicability of New York’s MCTMT on your business, please contact George Teixeira, Partner and Financial Services Tax Leader,
Alan Goldenberg, Principal and Leader of the State and Local Tax and Tax Controversy groups, or your Anchin Relationship Partner. 

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