Pass-Through Entity Tax—Technical Update
The New York State Pass Through Entity Tax (PTET) has undergone a variety of changes since its initial effective date of January 1, 2021. The state originally created this new tax on pass-through entities in response to the state and local tax deduction cap enacted under the federal Tax Cuts and Jobs Act. Although the Budget Act did not provide significant changes with respect to the NYS PTET, the legislative update does provide that the definition of taxable income includes NYS PTET taxes paid, NYC PTET taxes paid, and taxes paid to other jurisdictions that are substantially similar to NYS’s PTET tax, to the extent that such taxes were paid and deducted in the taxable year for federal income tax purposes. This applies to electing partnerships, standard S Corporations, resident S Corporations, city partnerships, and city resident S Corporations.
Metropolitan Commuter Transportation Mobility Tax
There were two major changes to the Metropolitan Commuter Transportation Mobility Tax (MCTMT). First, New York State updated its definition of net earnings from self-employment; the state previously conformed to IRC section 1402, which exempts certain limited partners from self-employment taxes. NYS’s new update provides that the exemption will not apply “if the individual, directly or indirectly, takes part in the control, or participates in the management or operations of the partnership such that the individual is not a passive investor, regardless of the individual’s title or characterization in a partnership or operating agreement.” As a result, there will be a significant increase in MCTMT taxes, even though these same partners may not be paying self-employment taxes at the federal level.
In addition to the change in definition above, the state increased the MCTMT top rate to 0.60% of payroll expense in excess of $437,500 in a calendar quarter for employers in the five counties that constitute New York City: Bronx, Kings (Brooklyn), New York (Manhattan), Queens, and Richmond (Staten Island). In addition, the individual top rate for net earnings from self-employment if such earnings exceed $50,000 has also been increased to 0.60%.
MTA Surcharge—Fixed Rate
A 30% tax rate was made permanent for tax years beginning on or after January 1, 2024, for the Metropolitan Transportation Business Tax Surcharge, better known as the MTA Surcharge.
Expansion of Credits
The changes to New York’s available tax credits served as a focal point of the Budget Act. Significant numbers of tax credits were either extended or created. Some notable credits included in the act were as follows:
- Existing Empire State Film Production Credit. The credit amount was increased from 25% to 30% of the “qualified production costs paid or incurred in the production of a qualified film” subject to the existing limitations and criteria. In addition, the new legislation includes changes related to definitions, who qualifies to take the additional 10% credit on wages/salaries, the expansion of the credit pool, and many other notable changes.
- The new Child Care Creation and Expansion Tax Credit allows qualifying businesses to expand their childcare programs offered to employees. The credit is allowable for up to 25 childcare seats and is equal to the sum of: the number of infant childcare seats that have been created or expanded, times 20% of the childcare rate for the infant childcare seats plus the number of toddler childcare seats that have been created or expanded, times 20% of the childcare rate for the toddler childcare seats.
- The existing COVID-19 Capital Cost Tax Credit deadline was extended. This credit, originally included in the New York State 2022/23 budget, is intended to provide financial assistance to New York State small businesses that incurred expenses complying with COVID-19 related public health and emergency orders and regulations. The budget authorized up to $250 million of credit to be distributed to taxpayers, with each qualified taxpayer eligible to receive a refundable credit for 50% of qualifying costs, up to $25,000. The credit will be allocated to qualifying taxpayers based upon the date a completed application is submitted. The deadline to apply for this program has been extended from March 31, 2023 to September 30, 2023.
- The NYC Biotechnology Tax Credit was created for the General Corporation Tax (GCT) and Unincorporated Business Tax (UBT) types, which was originally established for those subject to the Business Corporate Tax. The qualifications and rules of this credit under the Business Corporation Tax materially apply to GCT and UBT. The credit is available to qualified emerging technology companies that engage in biotechnologies and meet the eligibility requirements set forth by the city. The credit is available for periods beginning on or after January 1, 2023, and ending on or before December 31, 2025.
Tax Appeals Tribunal Rights
The Budget Act granted the Commissioner of Taxation and Finance within the Department of Taxation and Finance (DTF) certain authority to seek judicial review of Tax Appeal Tribunal decisions. The commissioner is granted authority to file an appeal, with procedures that allow for interest and penalty related to the appealed tax liability to be stayed until 15 days after the judicial decision is issued. The DTF’s new appeal right is limited to matters pertaining to the New York Constitution or United States Constitution, and certain federal or international laws. Previously, taxpayers were permitted to appeal tribunal losses to the New York State appellate courts, but the state was not granted such rights when they lost at the tribunal level. This provision is effective immediately; however, it is unclear how this change will impact various tribunal decisions in the future.
Changes to Penalty for Under-payment of Estimated Taxes
Under Tax Law section 1085, the state granted additional guidance for abatement of additions related to the underpayment of estimated taxes. The state provides that there will be no addition for underpayment of estimated tax, to the “extent the commissioner determines that by reason of casualty, disaster or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.” The guidance is vague about what is considered an unusual circumstance, but this change could potentially provide additional relief to some companies.
Major Proposed Changes Excluded from Legislation
One key item that was not included in the Budget Act was the initially proposed changes to New York’s S Corporation election procedures. The original proposals included an elimination of New York’s separate S Corporation election requirement for businesses seeking to elect S Corporation status within the state of New York. The final, signed version of the Act did not make any changes to these provisions, so a separate New York S Corporation election is still required at this time.
In addition, the state also did not include proposals to enact a sales tax on digital products and increase the personal income tax rates.
Pondering the Impact
The Budget Act focused on a variety of changes that will impact both business and individual taxpayers going into 2024. Though the changes enacted this year are not as significant as prior years, it is important for businesses and tax professionals to review the updates and how they may impact their companies and clients.