On April 10, 2017, Governor Andrew Cuomo signed into law New York’s 2017/2018 Budget Bill, which contains significant tax measures that CPAs need to be aware of. This article provides a summary of the key legislative tax changes that affect the state’s administration of its personal income tax, business related tax, sales and use tax, and tax credits.
Personal Income Tax
Reduction in personal income tax rates.
For tax years 2018 through 2024 and after, adjustments will be made to the personal income tax rates, including: 1) beginning in 2018, the 6.45% personal income tax rate ($40,000–150,000 bracket) will be reduced by 0.12% each year until it reaches 5.5% in 2025; and 2) beginning in 2018, the 6.65% personal income tax rate ($150,000–300,000 bracket) will be reduced by 0.08% until it reaches 6% in 2025.
Millionaire tax extended.
The budget extends the top tax bracket of 8.82% for two years (2018–2019), applicable to unmarried individuals with an income over $1 million, married persons and surviving spouses with an income over $2 million, and heads of the household with an income over $1.5 million.
Charitable contribution deductions.
The budget sets forth an additional limitation on charitable contribution deductions, which will expire by the end of 2019. For individuals with New York adjusted gross income (AGI) between $1 and $10 million, the deduction is limited to 50%, and for individuals with New York AGI over $10 million, the deduction is limited to 25%.
Sale or transfer of a partnership interest by nonresident partners.
Generally, for personal income tax purposes, the sale of a partnership interest is treated as a sale of an intangible asset, unless the assets of such partnership include New York real property and the value of such property is 50% or more of the total fair market value of all the partnership’s assets on the date of sale. The budget amends this provision by declaring that the gain recognized from the sale or transfer of a partnership interest by a nonresident partner that is subject to Internal Revenue Code section 1060 allocation will be treated as the sale of the underlying assets of the partnership, and will generate New York–sourced income to the extent that the assets associated are located in New York. This provision is effective immediately.
Parent and disregarded entity single taxpayer for tax credit purposes.
In Matter of Weber, DTA No. 825857, the New York Tax Appeals Tribunal reversed New York’s longstanding policy, ruling that a common parent and two single-member limited liability companies (SMLLCs) were to be treated as separate entities in determining eligibility for state tax credits based on the activities of the SMLLCs. The act changes the definition of SMLLCs, declaring that they are single entities for purposes of determining eligibility for New York tax credits derived from their activities. This provision applies retroactively to all tax years in which the statute of limitation is still open.
Maximum fixed-dollar minimum tax for non-captive REITs or RICs.
The bill sets the maximum fixed-dollar minimum tax for a non-captive real estate investment trust (REIT) or regulated investment company (RIC) at amounts from $25 (if New York receipts less than or equal to $100,000) and up to $500 (if New York receipts greater than $500,000).
Qualified financial instrument exemption for REITs and RICs.
The budget excludes mortgages, instruments that are “investment capital,” and instruments that produce “other exempt income” from the definition of “qualified financial instruments” if such instruments are held by stand-alone entities (i.e., not captive REITs or RICs). This provision is effective as of January 1, 2016.
Sales and Use Tax
Transaction between related entities.
Effective immediately, the law amends the term “retail sales” to include: 1) a sale to a single member limited liability company or subsidiaries that are disregarded for federal income tax purposes, for resale to a member or owner; 2) sale to a partnership for resale to one or more partners; and 3) sales to a trustee for resale to a trust beneficiary.
Use tax imposed on nonresident businesses.
Effective immediately, the budget act amends use tax for nonresident businesses. Prior law allowed nonresident businesses to bring property or services into New York State for use without incurring use tax; the act amends this by stating that the use tax exemption under Tax Law section 1118(2) will not apply when a nonresident business has not been doing business outside of New York for more than six months prior to the date of bringing the property or service into New York. This does not, however, apply to nonresident individuals.
Investment tax credit reform.
The bill excludes tangible personal property and other tangible property used by the taxpayer in the production or distribution of electricity, natural gas, steam, or water delivered through pipes and mains from the investment tax credit.
Workforce training credit.
This is an employee training incentive program that provides a tax credit to New York State employers that upgrade, retrain, or improve the productivity of their employees, as well as approved internship programs that provide training in advanced technologies.
Youth jobs program tax credit.
This credit has been extended for five years (through 2022) and has been renamed the New York Youth Jobs Program tax credit.
Alternative fuels and electric vehicle tax credit.
This credit has been extended for five years (through 2022).
Excelsior research and development tax credit.
The act increases this tax credit from 3% to 6% for qualified R&D expenditures that are conducted in New York, effective in 2018.
Adjusting to the New Reality
Given the number and complexity of the tax changes in the budget bill, CPAs need to understand how these changes impact New York taxpayers. CPAs should review the new rules to see how the changes impact specific tax positions.