Do New York's partnership filing fee and the New York City UBT pyramid through tiers of partnerships, and how does California's LLC fee compare?

Three charges, three tier rules

New York State charges a partnership or LLC a flat annual filing fee scaled to gross income, not a tax on income (Tax Law section 658(c)(3)). New York City charges a partnership the Unincorporated Business Tax ("UBT"), a 4 percent income tax (Administrative Code section 11-503(a)); the sources read show no City filing fee or minimum tax on a partnership. California charges an LLC an annual tax and a gross receipts fee (Rev. and Tax. Code sections 17941 and 17942).

A reader's "entity-level tax" may instead be New York's elective pass-through entity tax, which is outside this article: its credit goes only to direct partners taxable under Article 22, and a partner that is itself a partnership cannot claim it or pass it through (Tax Law section 860; Tax Department, pass-through entity tax page, updated April 3, 2026).

The State filing fee: each tier pays on the same income

Section 658(c)(3)(A) imposes the fee on every subchapter K LLC, every disregarded LLC and every partnership with any income derived from New York sources. A regular partnership, one that is neither an LLC nor a limited liability partnership ("LLP"), is exempt below $1,000,000 of New York source gross income. An LLC or LLP pays from $25 upward, $1,500 above $1,000,000, $3,000 above $5,000,000, and a cap of $4,500 above $25,000,000 (section 658(c)(3)(B)). The base is the preceding year's New York source gross income: the partners' or members' shares of federal gross income from the entity derived from New York sources, determined under Tax Law section 631 as if it governed a computation of federal gross income, with no deduction for cost of goods sold.

Why an upper tier's base includes the lower tier's income. A partner's gross income includes its distributive share of the partnership's gross income (IRC section 702(c)), so the upper tier's partners' shares of its federal gross income carry the lower tier's gross income. The source stays fixed at the lower tier. Under 20 NYCRR 137.6, an item attributable to the lower tier "retains the source and character determined at the level of the lower tier partnership," and the source and character "are not changed by reason of the fact that such item flows through the upper tier partnership." The regulation is written for nonresident partners, and the Tax Department's Form IT-204 instructions cite it for tiered partnerships, including a partnership not carrying on business in New York that "had New York source income" from its lower tier. An upper tier with New York source items therefore files Form IT-204; the annual filing fee page excludes an entity with no New York source items that files solely because it has a New York resident partner.

The mechanism, with its one-year lag. For calendar-year entities, the lower tier computes its 2025 New York source gross income on the worksheet for line 116a of the 2025 Form IT-204 and reports each partner's share on line 29a of the 2025 Form IT-204-IP. The upper tier carries that amount to line 14 of the New York source gross income worksheet for the 2026 fee, leaves partnership income out of lines 1 to 13, and enters the total on line 4 of the 2026 Form IT-204-LL, due on or before March 15, 2027. The 2025 Form IT-204-LL, due in March 2026, carries 2024 amounts. No instruction was found saying which lower-tier year an upper tier with a different year end uses. The upper tier's own 2025 line 116a and line 29a include line 14 in turn, so the amount climbs through every tier, one year behind the income.

No tier exclusion and no tier credit. Section 658(c)(3) has no tier language and no exclusion for income that already bore the fee. Paragraph (C) bars any Article 22 credit against the fee, and the statute provides no tier credit. No memorandum, advisory opinion or regulation addressed to the fee in tiers was found beyond the sourcing regulation. These are the statute's contents, not a stated Tax Department policy.

The $1,000,000 test counts lower-tier income. The instructions for Form IT-204-LL apply the test to line 4, which includes line 14. A regular partnership upper tier with no New York activity of its own therefore owes the fee once its share of lower-tier New York source gross income reaches $1,000,000, at $500 for exactly $1,000,000.

Conditions that stop or reduce the chain:

• No New York source items at a link. A link with no New York source items does not file Form IT-204-LL, and income that is not New York source never enters the base. A 2007 advisory opinion held an LLC trading securities for its own account not subject to the fee, because its dividends, interest and gains were not New York source income under section 631(d) (TSB-A-07(7)I). It construed the fee as it stood for 2007, the source-income condition in section 658(c)(3)(A) is unchanged, and it binds only its petitioner.
• First year. An entity with no New York source gross income for the preceding taxable year "shall pay the minimum filing fee" (section 658(c)(3)(B)). The Tax Department's instructions apply that as $25 for an LLC or LLP and, for a regular partnership, as no fee and no form, reading the $1,000,000 exemption as controlling. The second result is the instructions' reading, not the statute's words. In a chain, a newly formed upper tier pays $25 or nothing in its first year whatever its lower tier reported on line 29a, so the stacking begins in each tier's second year.
• Disregarded LLC. A disregarded LLC pays $25 regardless of income (TSB-M-08(3)I); a separate library piece covers how its income reaches its owner's base.
• Timing. Each fee rests on the prior year's figure, has no extension, and is not prorated for a short federal year.

The City UBT: the upper tier is taxed, and a credit removes most of the second layer

Reach. Administrative Code section 11-502(a) treats an unincorporated entity as carrying on "any trade, business, profession or occupation carried on in whole or in part in the city by any other unincorporated entity in which the first unincorporated entity owns an interest." An upper tier with no City operations therefore becomes a UBT filer through its lower tier, unless the lower tier carries on no City business. A separate library piece covers whether a disregarded intermediate LLC breaks the attribution.

A self-trading link is not outside the UBT as to its lower tier. The exemption for trading for one's own account in section 11-502(c)(2), and the partial exemption of (c)(4) for an entity primarily engaged in self-trading or investor holdings, remove only the self-trading activities of the entity and of lower tiers that are themselves so engaged, not a lower tier's City business attributed under subdivision (a). The 2025 instructions for Form NYC-204 apply the rule that way: an investment partnership that is a non-managing member of a dealer LLC is taxable on its share of the dealer LLC's income, gains and losses, while its share of a self-trading lower tier's income is not taxed.

Allocation. The City uses "allocation" for what most states call apportionment, a division of business income by formula. A partner allocates to the City the same percentage of its distributive share of each item of a partnership's business income, gain, loss and deduction as the partnership allocated for its own income (19 RCNY 28-07(j)(2)(i)(A)). The share is of the lower tier's items, so it is measured before the lower tier's own $5,000 specific exemption. An administrative law judge upheld the rule in December 2025, in a determination on which exceptions are pending (Matter of Cantor Fitzgerald Securities, TAT(H) 19-16(UB), N.Y.C. Tax App. Trib., ALJ Div., Dec. 16, 2025).

The credit. Section 11-503(j) gives the upper tier a credit equal to the lesser of two measures. Measure 1 is its proportionate share of the UBT the lower tier paid, plus the lower tier's credits other than the subdivision (b) credit, to the extent they did not reduce the lower tier's tax below zero (19 RCNY 28-03(d)(2)(ii)(A)). Measure 2 is the increase in the upper tier's own tax caused by the partnership items. The credit comes after the partner's own subdivision (b) credit and before any other credit in the section, and unused credit carries forward seven years.

Tiers. A partner takes the credit only for partnerships in which it is a direct owner (19 RCNY 28-03(d)(4)). A top tier still benefits from tax paid two levels down: the rule's own three-tier example gives the top tier the benefit of the middle tier's paid credit, because Measure 1 at the middle tier reflects the credits the middle tier claimed.

Where the City credit falls short

• The subdivision (b) credit. A lower tier whose tax is $3,400 or less pays nothing after the (b) credit, and the credit declines as the tax rises from $3,400 to $5,400, where it ends (section 11-503(b)(3-a)). Measure 1 counts only tax paid and excludes the (b) credit, so the eliminated amount never passes up. If the upper tier's own tax is too large for its own (b) credit to absorb the share, the upper tier pays UBT on income on which its lower tier paid nothing. The Department of Finance's likely position is that this is the statute's design, not a defect: the (b) credit relieves a small business of its own tax and was never a payment that could be credited to anyone else.
• The cap and Measure 2. The total credit cannot exceed the partner's tax reduced by its own (b) credit (19 RCNY 28-03(d)(2)(ii)(C)). Where the upper tier's own losses or other items mean the partnership items add less tax, Measure 2 is smaller and the credit is that smaller amount; where Measure 2 is larger, the credit is Measure 1 and the excess is tax paid.
• Continuity. An upper-tier partnership loses a carryforward unless partners holding at least 80 percent of its interests continue.
• Information. The credit depends on the lower tier's Schedule C of Form NYC-204 and the K-1, with the partner's Form NYC-114.7; a partner that never receives the schedule cannot compute Measure 1.

The $95,000 filing threshold. The instructions for Form NYC-204 state the threshold as total gross income from all business regardless of where carried on of more than $95,000 and say nothing about a distributive share, and no published Department of Finance statement on the point was found. The Department of Finance's likely position, stated as reasoning from the sources read: section 11-502(a) treats the upper tier as carrying on the lower tier's business, section 11-506(a)(2) and IRC section 702(c) give the share its character and put it in the partner's gross income, and Schedule B routes the share into the upper tier's return. On that reading an upper tier whose only City connection is a lower-tier interest files once its share of lower-tier gross income exceeds $95,000.

California: the fee excludes LLC tiers on a condition, the annual tax does not

The fee's tier exclusion and its condition. An LLC organized or registered in California, or doing business there, owes an annual tax of $800 (Rev. and Tax. Code section 17941; 2025 Form 568 Booklet). With total California income of $250,000 or more it also owes the fee, $900 at the bottom bracket and $11,790 at $5,000,000 or more (section 17942(a)). Total income excludes allocations, attributions and distributions to an LLC as a member of another LLC when "directly or indirectly attributable to income that is subject to the payment of the fee" (section 17942(b)(1)(A)). The Franchise Tax Board's instructions say total income "excludes all allocations, distributions, or gains from another LLC that was already subject to the LLC fee." A chain of LLCs therefore pays the fee once, at the LLC whose income was subject to it. The condition matters: a share from a lower-tier LLC whose income was not subject to the fee, such as one neither organized, registered nor doing business in California, is not excluded by the statute's words, and the Franchise Tax Board's likely position is that the member is held to the condition.

The exclusion speaks only of LLCs. An LLC that owns an interest in a pass-through entity "other than an LLC" reports its distributive share of that entity's California total income in its own fee base, built from its Schedule K-1 (565) income items grossed up by the Table 3 add-backs: cost of goods sold on Schedule IW line 3b and deductions on line 3c. A limited partnership owes the annual tax but no fee (section 17935), so the fee moves up to the first LLC in the chain. Whether "indirectly attributable" could reach a share that came through a limited partnership from a fee-paying LLC is the only part left open. The statute's capacity condition, "in its capacity as a member of, or holder of an economic interest in, another limited liability company," reads against it, and no Franchise Tax Board ruling on the point was found.

The annual tax stacks, on a condition. The Franchise Tax Board's booklet says a nonregistered foreign LLC that is a member of an LLC doing business in California is doing business there if it has "any ability or authority" "directly or indirectly, to influence or participate in the management or operation of the LLC." Where the condition is met at each tier, three LLCs in a chain pay three annual taxes and one fee, and each limited partnership doing business pays its own annual tax (section 17935). For taxable years beginning on or after January 1, 2027 and before January 1, 2030, the first-year amount is $400 for an entity required to file a return (sections 17941(g)(2) and 17935(f)(2)). The booklet states the Franchise Tax Board's position; no ruling or decision narrowing it was read. The Franchise Tax Board may also aggregate commonly controlled LLCs formed mainly to reduce the fee, with joint and several liability (section 17942(b)(2)).

A worked example

Facts (invented, with round figures). A consulting business is organized as an LLC taxed as a partnership ("the operating LLC"). A second LLC taxed as a partnership ("the fund LLC") holds 60 percent of it, and individuals hold the rest. The fund LLC has two members, an individual (50 percent) and a holding LLC (50 percent) that is taxed as a partnership and has members of its own, so none of the three is disregarded. The two upper tiers have no activity of their own, except that the second City case gives the fund LLC a City business. All three entities have calendar years and existed throughout 2025, so each has a preceding year for the 2026 fee.

New York State filing fee (the 2026 fee, based on 2025 amounts, paid with the 2026 Form IT-204-LL by March 15, 2027).

• The operating LLC's 2025 New York source gross income is $30,000,000, so its fee is $4,500.
• It reports 60 percent, $18,000,000, on the fund LLC's 2025 line 29a. The fund LLC enters that amount on worksheet line 14, lines 1 to 13 are zero, and line 4 is $18,000,000, a fee of $3,000.
• The fund LLC reports 50 percent, $9,000,000, on the holding LLC's 2025 line 29a. The holding LLC's line 4 is $9,000,000, a fee of $3,000.
• The total is $4,500 + $3,000 + $3,000 = $10,500 on one stream of receipts.

New York City UBT (2025), first case: the credit works. The operating LLC allocates 100 percent of its business to the City and has $1,005,000 of business income before the $5,000 specific exemption. Taxable income is $1,000,000 and the tax is $40,000, all paid, with no (b) credit because the tax exceeds $5,400.

• Fund LLC: its share is 60 percent of $1,005,000, or $603,000. After its own $5,000 exemption, taxable income is $598,000 and the tax is $23,920. Measure 1 is 60 percent of $40,000, or $24,000, and Measure 2 is $23,920. The credit is the lesser, $23,920, and the net UBT is $0.
• Holding LLC: its share is 50 percent of $603,000, or $301,500. After its own $5,000 exemption, taxable income is $296,500 and the tax is $11,860. Measure 1 is 50 percent of ($0 tax paid + $23,920 credit taken), or $11,960, and Measure 2 is $11,860. The credit is $11,860 and the net UBT is $0.
• The City collects $40,000 once, at the bottom.

Second case: the leak. The operating LLC has $85,000 of City business income before the exemption, taxable income of $80,000 and a tax of $3,200, which the (b) credit eliminates because the tax is $3,400 or less, so nothing is paid. The fund LLC also runs its own City business with $500,000 of income before the exemption. Its share of the operating LLC's items is 60 percent of $85,000, or $51,000, so its taxable income is $546,000 ($500,000 plus $51,000 less $5,000) and its tax is $21,840, too large for any (b) credit.

• Measure 1 is 60 percent of ($0 paid + $0 other credits), or $0. Measure 2 is $21,840 less the tax without the share ($495,000 times 4 percent = $19,800), or $2,040. The credit is the lesser, $0.
• The fund LLC pays $2,040, 4 percent of the $51,000 on which the operating LLC paid nothing.

California for comparison. All three LLCs are organized in California, so each owes the annual tax, and the operating LLC's total California income is $30,000,000.

• Operating LLC: the fee is $11,790 and the annual tax is $800. Fund LLC and holding LLC: allocations from an LLC whose income was subject to the fee are excluded, so with no other income total income is $0, no fee is due, and each owes $800.
• The total is $11,790 + $800 + $800 + $800 = $14,190: one fee and three annual taxes.
• If the operating entity were a limited partnership, it would owe its annual tax and no fee, and the fund LLC would include its 60 percent share of the partnership's California total income, $18,000,000, in its own fee base and pay $11,790.

What the example leaves out: other deductions before net income, differing year ends, losses at any tier, corporate partners, disregarded entities in the chain, the self-trading exemption, California apportionment of the operating LLC's receipts, and the pass-through entity tax.

Practice notes

Collect each lower tier's Form IT-204-IP line 29a every year and carry it to worksheet line 14 of the following year's fee computation, because a missing figure understates a fee that has no extension. Check each tier's first year, and test a regular partnership's $1,000,000 threshold on line 4 with line 14 included.

For the City, obtain the lower tier's Form NYC-204 Schedule C and the K-1 for every direct interest, check whether the lower tier's tax was absorbed by the section 11-503(b) credit before assuming the credit covers a share, and do not treat an investment or self-trading upper tier as outside the UBT because of its own trading.

For California, document that each excluded LLC amount came from an LLC whose income was subject to the fee, include shares from limited partnerships and other non-LLC pass-through entities with the Table 3 add-backs, and budget an annual tax for every LLC in the chain that is organized or registered in California or doing business there. G&G State Tax Group provides entity-level tax analysis for multi-tier partnership structures in New York and California, including filing fee and UBT paid credit reviews, alongside its state and local tax practice.