On March 30, Governor Andrew Cuomo and New York State legislators reached an agreement on the state’s 2018/19 budget, which the governor executed on April 12. This budget bill contains significant provisions passed in response to the federal Tax Cuts and Jobs Act of 2017 (TCJA). It will essentially decouple state tax law from federal tax law and provide state tax relief to individuals adversely affected by the TCJA’s $10,000 federal limitation on state and local tax (SALT) deductions. Some of the key changes associated with the 2018/19 state budget that CPAs should be aware of are outlined below.
Employer Compensation Expense Tax
The budget bill creates a new employer compensation expense tax (ECET). Employers that choose to opt in will pay a 5% tax on their annual payroll expenses on behalf of employees that make more than $40,000 per year. A new tax credit equal to the value of the ECET will reduce the personal income tax on wages; thus, the progressive personal income tax system will remain in effect.
The ECET is scheduled to be phased in over three years at rates of 1.5%, 3%, and 5%, beginning January 1, 2019. The first election date for employers who wish to opt in is December 1, 2018. Employers are required to remit the ECET at the same time that they would have been required to remit any withholding taxes. Under the new legislation, employers cannot deduct the tax from an employee’s wages, but the law does provide a tax credit for employers to offset administrative costs.
Employees will compute their credit against their NYS personal income tax using the following formula:
Employee’s wages × ECET tax rate × [1 − (Employee’s NYS Personal Income Tax, Before Credits ÷ Employee’s Taxable Income)]
For example, for 2019 (ECET rate of 1.5%), an employee with wages of $270,000 would have the following:
- NYS personal income tax before credits = $16,500
- NYS taxable income = $247,500
- ECET credit = $3,807 ($270,000 × 1.5% × [1 − ($16,500 ÷ $247,000)] = $3,807).
Although the ECET is intended to help offset the additional tax resulting from the $10,000 federal SALT limitation, employers may be wary of opting in and should weigh the costs and benefits of doing so.
Decoupling from Certain TCJA Provisions
Effective January 1, 2018, the budget bill decouples certain state tax laws and New York City administrative code sections from the provisions of the federal tax code. To avoid tax increases, it allows taxpayers to take an itemized or standard deduction for income tax purposes irrespective of which deduction was claimed at the federal level. Most importantly, New York State and New York City provisions specify that itemized deductions under the personal income tax will be based on tax rules and regulations prior to the enactment of TCJA (Public Law 115-97). In addition, there are new provisions relating to alimony payments, qualified moving expense reimbursements, and moving expenses.
Charitable Gifts Trust Fund
The budget bill creates a new Charitable Gifts Trust Fund (CGTF) that permits taxpayers to contribute toward the state’s provision of healthcare and education. The CGTF includes two separate accounts: the Health Charitable Account (HCA) and the Elementary and Secondary Education Charitable Account (ESECA). It is presumed that these charitable trusts will qualify under Internal Revenue Code (IRC) section 501(c)(3), permitting taxpayers to take a federal charitable deduction for amounts contributed. Contributions made to Health Research, Inc., the State University of New York Impact Foundation, or the Research Foundation of the City University of New York will be treated the same as contributions to the CGTF. School districts and local governments may also establish their own trust funds.
The purpose of these accounts is ostensibly to provide New York State taxpayers a way to pay their New York State personal income tax without being subject to the federal $10,000 cap on SALT deductions. Taxpayers may make contributions to the above accounts in lieu of paying the New York State Department of Taxation and Finance (DTF); any payments made will be considered partial payment of state personal income tax.
For taxable years beginning on or after January 1, 2019, taxpayers who make any contributions to these funds can claim a tax credit equal to 85% of the amount of the donation for the tax year after the donation was made.
On May 23, the IRS issued Notice 2018-54, which indicates that it intends to propose regulations that will address the federal income tax treatment of certain payments made by taxpayers for which they receive a credit against their state and local taxes. In general, it appears that the IRS will not allow states to circumvent the new statutory limitation on state and local tax deductions by allowing taxpayers to make transfers to funds controlled by state and local governments under the guise of a charitable contribution.
Effective for taxable years beginning on or after December 21, 2018, the budget bill provides a similar method for payment of real property taxes to avoid the $10,000 cap on the federal SALT deduction. School districts may establish charitable funds to receive charitable monetary donations to those funds, and counties within New York City may establish a Charitable Gifts Reserve Fund to receive charitable monetary donations. On or after December 31, 2018, owners of real property will be allowed a credit against their real property tax equal to 95% of the amount contributed to such funds. Participating municipal corporations may establish a limit on the amount of such credit to be allowed in any fiscal year.
In order to claim the above credit, the property owner must, after receiving acknowledgement of receipt from the charitable funds, present it to the appropriate collecting officer on or before the last day by which taxes may be paid without interest or penalty, together with a prescribed credit claim. If the property owner fails to present the acknowledgement and credit claim form in time, he may present them to the chief fiscal officer of the municipal corporation in order to receive a refund in the amount of the credit.
Taxpayers who made contributions to the above charitable funds may take an itemized deduction on their New York State personal income tax that may not exceed the amount of the property tax that had been imposed, minus the amount of the credit taken with respect to the contributions made.
The above provisions will mitigate the reduced SALT itemized deduction allowed on the federal income tax return.
On a cautionary note, the above tax provisions are reliant on the acceptance of the charitable accounts as qualifying charities under the federal tax code. While it is unlikely these charitable accounts will fail to qualify as recognized charitable organizations, the amount of the donation may be limited. If a taxpayer receives a benefit as a result of making a contribution to a qualified organization, she can deduct only the amount of the contribution that is more than the value of the benefit received.
It is arguable that any credits received from contributions to the charitable accounts—which are utilized to satisfy a donor’s personal income tax or property tax obligations—constitute a benefit to the donor, and there should be not a deductible charitable contribution. CPAs should be on the alert for IRS guidance or regulations addressing the New York State provisions or any similar laws passed in other states.
Other property tax changes include a mandatory school tax relief (STAR) income verification program and provisions that a married couple is not permitted a STAR credit on more than one residence during a taxable year, unless they are living apart due to a legal separation.
The purpose of these accounts is ostensibly to provide New York State taxpayers a way to pay their New York State personal income tax without being subject to the federal $10,000 cap on SALT deductions.
Exempt CFC Income
Beginning on or after January 1, 2017, the budget bill makes some changes to controlled foreign corporation income: 1) expanding the definition of “exempt CFC income” to include income that IRC section 951(a) required to be included in a taxpayer’s federal gross income; 2) adjusting the subtraction modification specific to IRC section 78 to limit the subtraction to dividends that are not included in the IRC section 250 deduction; 3) adding a new addition modification for an IRC section 965(b) deduction; and 4) providing for estimated tax penalty relief, under certain circumstances, for the period on or after January 1, 2017, and before January 1, 2018.
Personal Income Tax
The budget bill also makes various changes to the personal income tax:
- For calendar quarters beginning on or after January 1, 2019, the law provides for consistent treatment of quarterly employee wage reporting between the New York State DTF and Department of Labor.
- New York State part-year residents are required to include the days in New York for any domicile period when calculating the 183-day period for statutory residency.
- New York City personal income tax rates have been extended to 2021.
- For taxable years beginning on or after January 1, 2018, for purposes of the Empire State Child Credit, the provision’s reference to IRC section 24 will have the same meaning as it did before the TCJA.
Sales and Use Tax
Sales tax is generally a controversial topic, and one of the major issues is personal liability of responsible parties, whereby all partners, irrespective of their ownership, are strictly held liable for any unpaid taxes by their company. The budget bill is set to change this and provides sales tax liability relief for certain minority partners of a limited partnership or members of a limited liability company.
Effective June 1, 2018, the budget bill provides that sales from resale of food and beverages (including alcoholic beverages) by restaurants and similar businesses are excluded from taxable receipts. In addition, certain veterinary drugs and medicines are exempt from sales tax without requiring a credit or refund of tax on those transactions.
The budget bill provides the following as relates to credits and incentives:
- The Rehabilitation of Historical Properties Credit is extended to 2025.
- The Musical and Theatrical Production Credit is extended to 2022.
- Effective January 1, 2019, the state low-income housing credit is amended to hold the taxpayer that first obtained the credit, and not the party who the credit was transferred to, solely liable for all obligations and liabilities pursuant to the credit.
- For the Youth Jobs Program, the credits available to employers for tax years beginning on or after January 1, 2018 or 2019, have been increased.
- The Hire a Veteran Tax Credit is extended to 2021.
Although this year’s New York State budget impact is not as drastic as the recent federal tax legislation, it is important for CPAs and taxpayers to review the implications and applicability of the new rules and regulations their operations.