On March 31, 2014, Governor Andrew Cuomo signed into law a Budget Bill that contains broad and sweeping tax reform provisions that impact both businesses and individuals. These new laws include changes which will impact tax base, tax rates, apportionment methodology, nexus, tax credits and estate tax reform. Except where noted, the changes below are effective for taxable years beginning on or after January 1, 2015.
Notable Changes Adopted in the Budget
Property Tax Relief for Homeowners
For years beginning on or after January 1, 2014, the Budget includes a two-year property tax freeze to homeowners. This will be accomplished through payment of a rebate by New York State. In year one of the freeze, New York will provide tax rebates to homeowners who live in a jurisdiction that does not impose a property tax increase greater than 2%. In year two, rebates will be provided to homeowners who live in a jurisdiction that does not impose a property tax increase greater than 2% and agree to implement a shared services or administrative consolidation plan. This rebate does not apply to New York City homeowners.
Corporation Tax Rates
For tax years beginning on or after January 1, 2016, the Budget provides for a tax rate reduction from the current 7.1 percent to 6.5 percent of Entire Net Income (ENI) for corporate taxpayers. Certain New York manufacturing taxpayers will benefit from a zero tax rate effective for tax years beginning January 1, 2014 (more detail below). The Budget also contains:
- A reduction of the tax rate applied to the capital base computation, such that the current rate of 0.15 percent will be phased out for tax years beginning on or after January 1, 2021.
- Changes to fixed dollar minimum tax that could increase the tax for taxpayers who pay under this methodology.
- Additional tax brackets added to the fixed dollar minimum computation. Current law has a top bracket for the minimum tax which includes taxpayers with New York receipts over $25 million and a corresponding tax of $4,500. The new law has a top bracket of New York receipts of over $1 billion and a corresponding tax of $200,000.
- Elimination of the tax on minimum taxable income and the separate tax on subsidiary capital.
- An increase in the Metropolitan Business Surcharge from the 17 percent to 25.6 percent for tax years beginning on or after January 1, 2015, but before January 1, 2016. (The rates for future years will be determined at a later date.)
Rate Reduction for New York Manufacturers
Effective for tax years beginning on or after January 1, 2014, the Budget provides for a zero tax rate to be imposed on “qualified New York manufacturers”. A qualified New York manufacturer is a manufacturer owning property in New York that would be eligible for the investment tax credit and meets certain dollar value thresholds. It should be noted that the zero tax rate is applicable only to New York C corporations. The current legislation does not address the availability of a zero tax rate to flow- through entities such as New York S Corporations or entities taxed as partnerships. To qualify for the corporate income tax elimination available to manufacturers, non C corporation companies would have to restructure. This provision is deemed to be a major boon to businesses, especially in the upstate regions.
New York will join the trend of other states who have adopted a single sales factor apportionment methodology by adopting a market based sourcing regime for purposes of determining the revenue allocated to New York State. New rules are provided to address receipts from services, intangible property, sales of digital property and transactions in various types of securities. These rules will not impact businesses who sell tangible personal property.
New York’s current law provides for combined reporting based on the presence of substantial intercompany transactions. The new law replaces these rules with combined reporting now based upon unitary provisions. Combined reporting will now be required by any taxpayer:
- That owns or controls, directly or indirectly, more than 50% of the capital stock of one or more corporations or
- More than 50% of the capital stock of which is owned or controlled either directly or indirectly by one or more other corporations or
- More than 50% of the capital stock of which, and the capital stock of one or more other corporations, is owned or controlled , directly or indirectly, by the same interests and
- That is engaged in a unitary business with those corporations.
Corporations may elect to be combined with non-unitary companies provided that ownership thresholds are met. This election is irrevocable and is binding for the current year plus six additional years. The election will be automatically renewed for the next seven year period unless revoked.
Net Operating Losses (NOL)
The new law changes the NOL provisions from a pre-apportionment to post-apportionment computation. It also ends the requirement that the New York NOL usage will be limited to the same amount of NOL used for federal tax purposes. This will serve to “decouple” the New York NOL from the federal NOL. New rules also allow taxpayers to reduce future taxable income using NOL’s generated under the old (pre-apportionment basis) using a computation of a modified amount. A three year carryback period is permitted for NOL’s incurred in post-reform taxable years (but no NOL can be carried back to a taxable year beginning before January 1, 2015.)
Several new and expanded tax credits are contained in the budget including:
- Effective January 1, 2014, a new property tax credit equal to 20% of the real property taxes paid during the taxable year by qualified New York manufacturers. The budget will reduce manufacturers’ property taxes-even if they are paid through a lease. Manufacturers already getting tax breaks through other state programs, such as the Empire Zone or IDA, cannot claim the additional property tax reductions.
- Extension of the Empire State Commercial Production Credit through December 31, 2017,
- A refundable credit for telecommunications excise taxes paid by Start-Up New York companies,
- A new tax credit for musical and theatrical production companies equal to 25% of qualified production and transportation expenses, capped at $4 million per year,
- Extension of the Lower Manhattan Sales and Use Tax Exemption through September 1, 2017,
- Expands the investment tax credit to include the purchase of qualified depreciable property used in New York by businesses, in addition to manufacturers, including industrial waste facilities, research and development activities, broker-dealers in connection with the purchase or sale of stocks, bonds and securities, businesses providing investment advisory services for a regulated investment company, or loan origination services in connection with the purchase or sale of securities and businesses engaged in qualified film production activities.
Economic Nexus Standards
The Budget adopts an economic nexus standard such that a corporation deriving receipts of $1 million or more in a taxable year will now be subject to New York State tax. A corporation will be deemed to be doing business in the state if it has issued credit cards to 1,000 or more customers with mailing addresses within New York State. This provision will have the effect of bringing more out-of-state corporations into the grasp of New York State taxation.
Corporate Partner Nexus
Current law provides that a non-New York corporation is “doing business” and subject to New York taxation if it is a partner in a partnership or a member in a limited liability company or partnership (other than a portfolio investment partnership) and meets one of 10 tests such as holding a greater than 1% LP interest. The new law provides that a corporate partner will now be subject to tax in New York by holding any type of partnership/LLC/LLP interest that is doing business in the state.
Fulfillment Center Exception
Current New York law included an exception to the establishment of nexus if an out-of-state corporation’s only activity in the State was the use of an unrelated fulfillment center in New York to store and ship inventory. The new law repeals this exception.
Merger of Bank Tax and Corporate Tax Regime
One of the Governor’s stated reasons at the beginning of the budget process was to provide tax simplification and relief and improve voluntary compliance. The elimination of the separate bank tax regime is purported to address this simplification. Banks will now be taxed under the corporate tax provisions. Thrift institutions and Qualified Community Banks (“QCB”) will be entitled to one of three special subtraction modifications effective for tax years beginning on or after January 1, 2015:
- Special subtraction modification #1 – Thrifts and QCB will be allowed a deduction of 32% of entire net income that exceed charge-offs, or
- Special subtraction modification #2 – Small Thrifts and QCB will be allowed a deduction of 50% of the net interest income related to “Qualifying Loans”. One of the qualifications for Small Thrifts is the average assets of the taxpayer or affiliated group must not exceed $8 billion. Qualifying loans are small business loans or a residential loan the principal amount is $5 million or less, or
- Special subtraction modification #3 – Small Thrifts and QCB that has maintained a captive REIT on April 1, 2014 will be allowed a deduction of 160% of the dividends paid deduction allowed for federal income tax purposes. A small Thrift or a QCB that maintains a captive REIT will not be allowed to utilize either of the first two modifications.
One of the qualifications of a QCB is that the average assets of the taxpayer or affiliated group must not exceed $8 billion. Each of these subtraction modifications require detailed information that will all be subject to questions under audit. Depending on which subtraction modification used the change to the taxpayers’ effective tax rate could be a permanent benefit or a temporary benefit.
Other change effecting financial institutions includes
- Apportionment for loan interest income will be customer sourced instead of the greater of the income producing activities.
- Qualified financial instruments can be allocated to NYS on a fixed percentage method of 8% instead of commercial domicile.
Estate and Gift Tax Reform
The budget includes language which will generally conform New York’s estate tax to the federal estate tax law as of January 1, 2014. The New York estate tax exemption rises to $2,062,500 for decedents dying on or after April 1, 2014 and will increase each year until reaching an exemption of $5,250,000 for those dying on or after April 1, 2017 and before January 1, 2019. The exemption will then be indexed for inflation. The new law also requires an addition to the estate tax base for gifts made by the decedent within 3 years of death if the decedent was a New York resident at the time the gift was made (applies to gifts made on or after April 1, 2014 and before January 1, 2019). The law makes no changes in the current New York estate tax rate.
As described above the new budget contains a myriad of changes which will impact many taxpayers – located both within and outside of New York State. As the effective date for many of these provisions is January 1, 2015, taxpayers should evaluate the impact the changes have on their tax filing methodology and overall tax liability.
It should be noted that the enactment date of this bill, March 31, 2014, creates a first quarter 2014 law change. Impact on financial statement disclosures and deferred tax assets or liabilities should be taken into account when evaluating the potential effect to financial statement preparation.