(d) All compensation, including all pass-through compensation for services paid to, on behalf of, or for the benefit of owners of a pass through entity, shall be included in the calculation of such entity's payroll expense tax base for purposes of determining such entity's tax liability under this Article. For purposes of this section, the "pass-through compensation for services" of a pass-through entity shall be the aggregate compensation paid by such entity for personal services rendered by all such owners, and shall not include any return on capital investment. The taxpayer may calculate the amount of compensation to owners of the entity subject to the Payroll Expense Tax, or the taxpayer may presume that, in addition to amounts reported on a W-2 form, the amount subject to the payroll expense tax is, for each owner, an amount that is two hundred percent (200%) of the average annual compensation paid to, on behalf of, or for the benefit of the employees of the pass-through entity whose compensation is in the top quartile (i.e., 25%) of the entity's employees who are based in the City; provided, the total number of employees of the entity based in the City is not less than four.
Per the above regulation, San Francisco payroll expense includes guaranteed payments and distributions to an owner for services performed exclusive of any return on capital investment or profit interest. The shareholders had total GP of $8,291 and distributions of $555,611, for total of $563,902. How would you calculate the portion of the distributions that are considered return on capital? The business is not a capital intensive business - they are in the professional services business so their profit is generated by leveraging their employee's hourly billing rate.
Also, does it matter than one partner is in northern CA and one partner is located in SF? Should the northern CA's partners GP and dist still be considered "SF payroll expense"? The business has physical office space in SF. I am not finding anything to indicate that it should be excluded...
I'd appreciate any thoughts you all have on this.