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The author is a tax partner and director of employee benefits practice at the accounting and consulting firm Anchin Block & Anchin of New York If you are an associate or partner practicing law in New York, you could be subject to New Jersey tax in one of several ways. First, if you are a resident of New Jersey and commute to New York, New Jersey taxes you on all of your income regardless of where it is earned. Additionally, New York will tax you on the income you earn in New York. New Jersey then allows you a credit (basically a dollar-for-dollar reduction, subject to certain limitations) for taxes paid to other jurisdictions, such as New York. This credit is designed to help New Jersey residents avoid paying state tax twice on the same income. Second, you could be subject to tax in New Jersey even if you don’t live there. If you live and work in New York and render some services in New Jersey for your clients located there, you will be subject to tax in New Jersey. Like most states, New Jersey taxes nonresidents on the portion of their income that is attributable to services performed in the state. Therefore, if you spent time in New Jersey at your client’s office, or appeared in court in New Jersey, you are required to allocate a portion of your income to New Jersey and pay tax to the state. Furthermore, if you are a partner in a partnership that does business in New Jersey, you will be required to file a New Jersey return reporting your share of the partnership’s income which is attributable to New Jersey services. This is true regardless of whether you personally are present in the state rendering services. If you are subject to tax under any of these circumstances, you should be aware of the state’s aggressive pursuit of nonresident individuals and partnerships that do business in the state and don’t file tax returns, as well as the significant tax law changes enacted this summer. The new legislation has a significant impact on reporting and compliance at the entity level. Tracking Down Nonfilers Ever since the infamous San Diego Bar Association survey of the early 1990s indicated that 10 percent of the membership was either filing their personal income tax returns late or not filing at all, attorneys have been fertile ground for various compliance projects initiated by either the Internal Revenue Service or state and local tax authorities. Most states consider an “employer” as anyone doing business within the state regardless of whether or not they have an office there. An employer doing business in a state is usually subject to tax in the state. Law firms often overlook the fact that doing business within a state, whether performing services for a client or appearing in court, requires allocating income to that state and filing an income tax return. Some states, including New York and New Jersey, require out of state firms to file a tax return if they have a partner resident within the state, even if they are not doing business in the state. Amnesty Project Recently, New Jersey took its efforts of ferreting out nonfiling attorneys and law firms to a new level of aggressiveness. The state, in coordination with their amnesty project, sent out notices to attorneys listed in the New Jersey court dockets with a non-New Jersey address who had not filed New Jersey tax returns. These notices were sent not only to law firms, but also to individual attorneys, including partners and associates. Unfortunately, these notices went out just prior to the expiration of the amnesty program and caused a lot of last-minute scrambling to obtain the information required for amnesty filings. In many instances the attorneys may not have actually appeared in court, but had local counsel handle the filings. If services are performed on behalf of a law firm in the state of New Jersey, the law firm will be required to allocate a portion of its income to New Jersey based on the portion of revenue earned and services rendered within the state. Additionally, payroll withholding is required, and salaried employees would have an individual tax return filing requirement for wages earned within the state. For law firms that are required to file tax returns and allocate income to New Jersey, the difficulty in gathering the appropriate information to prepare a complete and accurate return often creates a problem. A time and billing system that allows attorneys to input time by location will save that last-minute scrambling to gather the relevant data. In some instances, the New Jersey tax filings and remittances for nonresident partners can be handled via the filing of a composite return. With a composite return, the partnership files a return on behalf of those nonresident partners electing to participate. This relieves the individual partner of the requirement to file an individual New Jersey return. New Legislation In addition to New Jersey’s aggressive program of tracking down lawyers and law firms who are not filing New Jersey returns, a recent overhaul of the New Jersey tax system will have an impact on law firms that do have a nexus to the state. Effective for tax years beginning on or after Jan. 1, 2002, partnerships that have income derived from New Jersey sources must pay a filing fee of $150 per owner. For example, a New York based law firm that has 50 partners would be required to pay a $7,500 annual filing fee (50 x $150) if it derived any income from New Jersey sources, no matter how small. In their infinite generosity, the state has agreed to put a cap of $250,000 on the fees due from an entity in a given year. The filing fee must be paid in installments, with 50 percent of the liability due on the 15th day of the fourth month of the current fiscal year, with the remaining amount due at tax return filing time. Even though a Professional Corporation is not a partnership, it is also subject to the $150 fee which is assessed against each licensed professional. This will be very costly for large PCs that have New Jersey source income. The $150 fee does not apply to partnerships that do not receive income from New Jersey sources but only file a New Jersey return because it has a partner who is a resident of New Jersey. Another New Jersey law change requires partnerships to withhold and pay tax for nonresident partners’ income that is allocated to New Jersey. Partnerships must now pay tax at a rate of 9 percent of each nonresident corporate partner’s share of partnership income allocated to New Jersey, and a 6.37 percent tax on each nonresident, noncorporate partner’s share of income allocated to New Jersey. Tax payments made in this manner will be credited to a separate account for each partner based upon the partner’s share of allocated income and tax applied. The nonresident partners can then claim a credit on their own New Jersey return for the amount of tax allocated to them by the partnership. Excess payments may then be refunded to the partners on their own individual tax returns.

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