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NEW YORK CITY-Legislation currently being developed by the New York City Council would provide a welcome break for shareholders in S-corporations doing business here. Insiders are pinning the amount of tax savings at as much as $40 million.

Under IRS provisions, companies applying for S-corporation status get specific tax breaks. Unfortunately for New York City residents who are shareholders, the city does not recognize the S-corporation structure, even though New York State does.

“Most states just piggyback on the federal election, and you are automatically an S-corporation,” says Susan F. Klein, a partner in the local office of Chicago-based law firm Winston & Strawn. “New York State is one of the few states that require a special election.”

Klein uses a client as an example of the burden local players shoulder without the local provision. “A corporation I represent has approximately a half billion dollars of real estate, a large part of it being major office buildings here in New York City,” she explains. “This corporation is now a C-corporation, and their tax bill is burdensome.” The process is under way to convert the client to an S-corporation, a move that as of now will have little tax significance in the city.

The company today has to deal with both a corporate-level tax and a dividend tax. Even when conversion is complete, says Klein, “We’ll have full-blown double taxation of income.”

The legislation, which is expected to be in Albany in time for the start of the new legislative session in January, would change that, but the relief would come in the form of a credit, says Klein, and it would focus specifically on the portion of the company’s income allocated to New York City.

“The corporation would continue to pay its 8.85% tax rate on New York City income, but the city would grant the same credit at the individual level,” she explains. The credit, she says, would range from 15% to 65% of the 8.85% corporate tax.

“When the city council first looked at the issue, it projected an overall tax savings for everybody of about $40 million,” reports Klein. “There are presently approximately 110,000 S-corporations operating in New York City or subject to tax here.”

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