CA & NY K-1s

One of my clients (new client this year) acquired equity in the company he works for. The main parent is organized as a partnership, and this client received a K-1. As the company has offices in several states, the client received several state K-1s, including CA and NY.

I am going to have a discussion with this client regarding cost-benefit of filing and setting an internal minimum source income threshold before we consider filing.

For example, if a K-1 has low three figure source income, we're probably not going to file. If the state comes after us with a notice and nominal interest, the client will pay it without protest as long as it looks materially right.

Two of the state K-1s are for CA and NY. CA has low three figure source income and NY has just under $1,000 of source income.

I have heard stories of CA sending notices for nominal 1099-NEC source income, and know them to be aggressive. NY is also somewhat aggressive in their collections.

Let's say the CA K-1 has $250 of CA source income, and the NY K-1 has $1,000 of source income, would you expect CA and/or NY to send a notice if a return is not filed?

Both numbers are well under the state filing thresholds. I don't think there is a need to file.

Howard, I was under the impression that both CA and NY presently have a worldwide gross income threshold. That is, the test for a nonresident filing is two prong: (1) any source income from the state and (2) worldwide gross income (or AGI) above a certain threshold, which is usually pretty low.

I ran a quick mock up and my client would owe like $10 to CA, and $80 to NY. We're going to pass on CA, and will likely pass on NY as well. We'll implement an internal minimum amount of source income needed before we file. I'm thinking $2,500 is appropriate given the circumstances and the client. A prior firm I worked with set their threshold at $10,000 for a high earner executive type. I'd have to charge $100-200 additional for each state, depending on the state, so we're just being practical.

For the attorneys, out of curiosity is there a statute for collection for most states? It's my understanding that the statute never closes on a return that's not filed. At the federal level at least.

Man - you are correct - section 683 of NYS tax law provides an unlimited period for assessment if no return is filed.

I see. You are correct, I misread the following IT-203 instruction:

• You have income from a New York source (see below and
page 6) and your New York AGI (Federal amount column) is
more than your New York State standard deduction.

Strange that it says New York AGI but uses the Federal amount column rather than the NY state amount column.
Typical NY money grab.

Man - you are correct - section 683 of NYS tax law provides an unlimited period for assessment if no return is filed.

Thanks. I'll discuss the pros, cons and risks with the client.

I see. You are correct, I misread the following IT-203 instruction:

• You have income from a New York source (see below and
page 6) and your New York AGI (Federal amount column) is
more than your New York State standard deduction.

Strange that it says New York AGI but uses the Federal amount column rather than the NY state amount column.
Typical NY money grab.

NY AGI is federal AGI after NY specific adjustments. New York source income is what you're thinking about. Interestingly (though I suspect of likely no legal importance), NY AGI isn't a defined term with respect to a nonresident. The nonresident rules simply reference federal agi, and then re-reference the specific modifications enumerated in the statute defining NY AGI for residents. But, anyway, I do agree, it's confusing wording.