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New UBT Rules for Legal Work in NYC

By Joseph A. Bailey, Jr., Peter Leonardis and Gregg Sincoff

New York City's 2006 Executive Budget, recently passed by the NY State Legislature (S5568/A8434), significantly changes the NYC Unincorporated Business Tax (UBT) rules. Assuming the law is signed by the governor, as expected, law firms working in NYC will need to adjust to changes in three areas:

  • Apportionment: Retroactive to Jan. 1, 2005, the preferred method of apportionment changes from the separate-books-and-records method to the three-factor formula apportionment method.
  • Sourcing: For law firms with gross receipts of $300,000 or more, receipts from services in taxable years beginning on or after July 1, 2007 will no longer be sourced to the assigned office of the timekeeper; instead the receipts will be sourced based on where the timekeeper actually works.
  • Property: For UBT purposes, a law firm's taxable property in NYC will now include both rented real property and rented personal property. The value of such rented property is now codified at eight times the annual rent.

This legislation aims to modernize the UBT and to obtain greater conformity between the UBT and the NYC General Corporation Tax, both substantively and with respect to the Tax Commissioner's discretionary powers. Ironically, the changed UBT apportionment rule is now out of alignment with the corresponding tax rule for NY State. Whether the latter will be revised remains to be seen. It is also too early to tell how the Commissioner will apply his discretionary authority to determine what is fair for the City.

Following are some details of these UBT changes, some thoughts on how they may affect law firms, and our recommendations for how firms should respond.

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