NYC Hedge Funds Angle for Work-From-Home Windfall on Their Taxes
Hedge fund managers who fled Manhattan to work from second or third homes could end up saving millions, and cost New York dearly.
(Bloomberg) -- Hedge fund managers who fled Manhattan to work from their second or third homes this year could end up saving millions of dollars -- and cost New York City dearly.
Investment firms that pay the city’s unincorporated business tax -- a 4% levy that brought in more than $2 billion last year -- may be able to slash their bills because, for the first time, most of their income is being earned outside Manhattan. The UBT is assessed on the bottom lines of businesses operating in New York City that aren’t organized as corporations.
“The UBT isn’t imposed on all of a business’s income,” said Timothy Noonan, a partner at the law firm Hodgson Russ. “It’s only imposed on the portion allocated to the city. For service businesses, the rule is simple: You look to where the services are being performed.”
Right now, plenty of those services are being carried out in tony enclaves where portfolio managers, traders and analysts own homes and often live, usually part-time. Think Greenwich, Connecticut, or Palm Beach, Florida.
For New York City, which is already facing a severe fiscal crisis --- revenue has plunged $9 billion since January -- that may mean yet another financial hit. The city’s Independent Budget Office forecasts revenue from the UBT will fall 17% this year to $1.7 billion, a decline that could accelerate if many of the city’s most profitable businesses use work-from-home policies to save on taxes.
A spokesperson for the New York City Department of Finance didn’t reply to requests to comment.
Businesses paying the UBT come from every sector of the city’s economy, from construction and manufacturing to advertising and performing arts. But the securities and commodities industry paid almost 30% of partnership UBT revenue in 2016, according to the latest city data. That’s second only to legal businesses at 32%, and well ahead of the real estate sector at 9.2%.
An analysis conducted with Monaeo -- a technology tool offered by Topia Inc. that helps companies track employee locations for tax purposes -- demonstrates how the industry could use UBT tax rules to their advantage.
Accountants Inundated
Until March, almost all of the 85 employees at a hedge fund with $40 billion in assets spent the majority of their workdays in New York City. Then, they scattered. From mid-March to the end of June, 38% of the staff was still working primarily in the city, the analysis shows. Half of the workforce ended up in either New Jersey, Connecticut, or outside the city’s five boroughs. The remaining 12% were split among Florida, California and several other states.
Topia estimates the firm, which it didn’t name, could cut its UBT bill this year by $4 million to $8 million.
Given the potential savings, hedge funds, private equity firms and other investment companies have been inundating accountants and lawyers for advice on lowering their UBT bills.
“The asset managers are very savvy. They’re all over this,” said Nishant Mittal, senior vice president and general manager of business travel at San Francisco-based Topia.
The first hurdle for companies: proving employees are truly working outside the city.
Finance Department officials may add other obstacles. They may try to dissuade firms from deploying the strategy by issuing a regulation clarifying how the UBT should be calculated by firms whose employees are working from home.
For example, officials could argue that employees are still relying on technology, including computer servers and networks, that operate from their New York City offices, said Maury Cartine, a lawyer and certified public accountant who is a partner at accounting and tax advisory firm Marcum.
Absent that, the city could hold off taking a position and audit firms down the road. Ultimately, disputes could be settled in court, he said.
“You can bet your last dollar that New York City is not going to be rolling over on these issues, because of the amount of money involved,” Cartine said.
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