New York Advisory Opinion TSB-A-82(2)I: When claiming New York's maximum tax rate on personal service income, how much of a non-corporate business owner's earnings can count as 'personal service income,' and how does an accelerated depreciation tax preference item affect the computation?

Plain-English summary

Louis and Shirley Chauvin claimed New York's maximum tax rate on personal service income (former Tax Law § 603-A) on their 1978 return. Upon audit, the Department proposed excluding 70% of an item of earned business income from their New York personal service income, and the Chauvins also had an item of tax preference for accelerated depreciation. They asked whether the audit's approach, and the treatment of the depreciation preference, were correct.

On the business income question, the Department explained that former § 603-A(b)(1) defined "New York personal service income" by reference to items includible as personal service income under former federal Internal Revenue Code § 1348 (the federal maximum-tax provision then in effect), to the extent those items were included in New York adjusted gross income. The federal regulations under section 1348 provided that where an individual runs a non-corporate trade or business in which both personal services and capital are material income-producing factors, only a reasonable allowance as compensation for personal services actually rendered counts as earned income - and that amount can never exceed 30% of the individual's share of the business's net profits. Because the Chauvins' business income came from exactly that kind of mixed personal-service/capital business, they could include in their New York personal service income only a reasonable-allowance amount, capped at 30% of their share of the profits - meaning the audit's proposal to exclude 70% was consistent with, not contrary to, this federal 30% ceiling.

On the depreciation question, the Department turned to former § 603-A(c), which defined New York personal service taxable income as a ratio-based portion of the taxpayer's New York taxable income (based on how much of their New York adjusted gross income was personal service income), reduced by the sum of all of the taxpayer's items of tax preference for the year. Since the Chauvins' accelerated depreciation deduction was itself an item of tax preference, it had to be subtracted from the ratio-based amount in arriving at their final New York personal service taxable income - a straightforward application of the statute's stated formula.

What this means for you

Business owners with mixed personal-service and capital-intensive non-corporate businesses claiming the maximum tax rate

Understand that only a reasonable allowance for your personal services - capped at 30% of your share of the business's net profits - counts toward "personal service income" for maximum-tax purposes, even if you feel your personal efforts drive most of the business's income. Capital-intensive businesses face this ceiling regardless of actual services rendered.

Taxpayers with accelerated depreciation or other tax preference items claiming the maximum tax rate

Expect your tax preference items (like accelerated depreciation) to reduce your New York personal service taxable income dollar-for-dollar under the statutory formula - they aren't a separate, independent calculation but a direct subtraction from your ratio-based personal service income figure.

Accountants computing the maximum tax rate for clients in mixed personal-service/capital businesses

Apply the 30%-of-net-profits ceiling from the federal section 1348 regulations first to determine qualifying personal service income, then separately subtract the client's total tax preference items under the statutory formula to arrive at personal service taxable income - treating these as two distinct, sequential steps rather than one combined calculation.

Common questions

Q: I run a business where both my personal effort and capital investment generate income - how much can I count as "personal service income" for New York's maximum tax rate?
A: Only a reasonable allowance for your actual personal services, capped at 30% of your share of the business's net profits - even if you believe more of the income reflects your personal efforts.

Q: I have an accelerated depreciation item - does that reduce my personal service taxable income?
A: Yes. Under the statutory formula, all of your items of tax preference (including accelerated depreciation) are subtracted from the ratio-based portion of your New York taxable income to arrive at your final personal service taxable income.

Q: Is the 30% cap unique to New York, or does it come from federal law?
A: It comes from federal law - former Tax Law § 603-A(b)(1) incorporated the personal service income definition (and its 30%-of-net-profits ceiling) from former Internal Revenue Code § 1348 and its regulations.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a82_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82 (2) I
Income Tax
April 2, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I810901B

On September 1, 1981 a Petition for Advisory Opinion was received from Louis and Shirley
Chauvin, c/o Edward Green, Ninth Floor, Lincoln Center, Syracuse; New York 13202.
Petitioners inquire as to the proper treatment of certain business income, and of a deduction
for accelerated depreciation, within the context of the maximum tax rate on New York personal
service income provided for under section 603-A of the Tax Law.
In their Personal Income Tax return for 1978, Petitioners claimed the application of the
maximum tax rate on New York personal service income. Upon audit, it was proposed that 70% of
an item of earned business income be deleted from Petitioners' New York personal service income.
Section 603-A(b)(1) of the Tax Law, as it applied to calendar 1978, provided, in relevant part, that
"For purposes of this section the term 'New York personal service income' means items of income
includible as personal service income for purposes of section one thousand three hundred forty-eight
of the internal revenue code, to the extent such items of income are includible in New York adjusted
gross income .... " Regulations promulgated with respect to section 1348 of the Internal Revenue
Code, applicable to calendar 1978, provide that: "If an individual is engaged in a trade or business
(other than in corporate form) in which both personal services and capital are material income­
producing factors, a reasonable allowance as compensation for the personal services actually
rendered by the individual shall be considered earned income, but the total amount which shall be
treated as the earned income of the individual from such a trade or business shall in no case exceed
30 percent of his share of the net profits of such trade or business .... " 26 C.F.R. 1.1348-3(a)(3)(i).
In the present instance the item of income at issue was derived from a non-corporate trade or
business in which both personal services and capital were material income-producing factors.
Accordingly,' Petitioners are entitled to include in their New York personal service income that
portion of such earnings which represent "a reasonable allowance as compensation for the personal
services actually rendered," but not in excess of 30% of Petitioners' share of the net profits of the
business.
Petitioners next inquire as to the proper treatment of their New York item of tax preference
for accelerated depreciation in computing New York personal service taxable income. The New
York personal service taxable income of an individual is defined, in section 603-A(c) of the Tax
Law, as:

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-82 (2) I
Income Tax
April 2, 1982

". . . the excess of
(1)

the amount which bears the same ratio (but not in excess of one hundred percent) to
his New York taxable income as his New York personal service net income bears to
his New York adjusted gross income, over

(2)

the sum of his items of tax preference, as defined in this article, for the taxable year."

Petitioner's deduction for accelerated depreciation constituted one of such items of tax preference,
and is thus required to be subtracted, as provided in the above-quoted statutory provision, in arriving
at the appropriate figure for New York personal service taxable income.

DATED: April 1, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau