New York State and New York City corporate tax reform.
State and City Changes
A majority of the New York State and City changes were effective as of January 1, 2015 (exceptions are noted below). With respect to the New York City changes, the corporate reforms only apply to federal C corporations--the city does not recognize S corporations and treats them as C corporations for income tax purposes. Accordingly, New York City's corporate reforms will not apply to S corporations, which will continue to be subject to the New York City income tax based on the old general corporation tax rules. In addition. New York City's corporate tax changes will not apply to insurance corporations (which are not subject to the city's corporate income tax), publicly supervised utilities, or entities subject to the unincorporated business tax.
Both the New York State and New York City corporate reforms contain significant changes that affect many taxpayers. It is important for every corporation subject to state and city taxation to review its filing position and identify whether any of the recently enacted provisions will result in increased tax liabilities or provide tax planning opportunities. The most significant changes are detailed in the following paragraphs.
Corporate Income Tax Rate
New York State. The corporate tax reform resulted in a tax rate decrease, effective as of January 1, 2014, for "qualified New York manufacturers," as specifically defined under the legislation, from 5.9% to 0%. This rate change does not translate to a zero tax. Qualified New York manufacturers are still subject to tax on the higher of either the capital tax base or minimum tax base. In addition, the alternative minimum tax base has been repealed. For all other industries, beginning January 1, 2016, the corporate income tax rate will be reduced from 7.1% to 6.5%.
New York City. Under the city's tax reform, there is no similar rate reduction, and the city's definition of a qualified manufacturer is slightly different from the state's definition. Depending upon the manufacturer's income, the city tax rate will range between 4.425% and 8.85%. Unlike New York State, New York City did not reduce this rate to 0%. The tax rate for small businesses will range between 6.5% and 8.85%, based upon the business income allocated to New York City. Major financial corporations having more than $100 billion in assets will be taxed at 9%; all other businesses will still be subject to the 8.85% tax rate.
Combination and Unitary Filing Rules
New York State. Mandatory water's-edge unitary filing rules have been adopted by the state. A combined return will be required if a corporation has 50% or more common direct or indirect ownership of another corporation and the entities are unitary. New York State will also allow an irrevocable and binding seven-year election that will treat all corporations that meet the 50% ownership test as part of a single combined group. Any newly formed or acquired corporations that meet the 50% ownership test will automatically be included in the combined group as long as the seven-year election is effective. The election will be automatically renewed for an additional seven years unless revoked by the taxpayer.
New York City. New York City is conforming to New York State's new changes for combined reporting.
Economic Nexus Standard
New York State. The New York Tax Law provides that a corporation is subject to corporation tax if it derives receipts from New York activities. A corporation is now deemed to be deriving receipts from New York activity if it has $1 million or more of receipts included within the numerator of its receipts factor under New York's apportionment sourcing rules. In addition, a credit card company is also deemed to be doing business in New York if it has issued credit cards to 1,000 or more New York customers, has contracts covering at least 1,000 merchant locations, or has at least 1,000 New York customers and merchant locations. Accordingly, a corporation that has New York State-sourced receipts in excess of $1 million will have nexus and be required to file a New York State corporate income tax return. For a corporation that files on a combined basis, the law now has certain aggregation rules that will be applied: the $1 million receipts threshold is to be applied by aggregating the New York receipts of all members of the combined group that have at least $10,000 of New York receipts and meet the greater-than-50% common ownership test. Non-New York State corporations whose in-state activities are limited to mere solicitation of sales pursuant to Public Law 86-272 will not be subject to the state's income tax, but will still be required to file a return. Public Law 86-272 generally protects taxpayers whose only activity in a state is the solicitation of sales of tangible personal property; for example, this protection will not apply to taxpayers who provide services or perform activities exceeding solicitation.
New York City. The city has not adopted a similar economic nexus standard, with the exception of financial institutions issuing credit cards.
Sourcing of Receipts and Sales for Apportionment Purposes
New York State. New York State adopted market (customer-based) apportionment for sourcing gross receipts. Essentially, receipts will be apportioned to the state in which the customer is located or receives the benefit of the service.
New York City. New York City is conforming to the state's newly adopted apportionment method.
Entire Net Income Base
New York State. Under the reform law, the entire net income (ENI) base will be changed to the business income tax base, which will result in the following major changes:
*Investment income will be exempt from tax and the law will now significantly narrow the definition of what constitutes investment capital and investment income.
* All subsidiary capital and income will be treated as investment capital and income, and be exempt from tax.
* The "other exempt income" category will consist of income from controlled foreign corporations and dividends from unitary subsidiaries that are not included in a taxpayer's combined report. These items will be included as part of investment income.
* The expense attribution will be either 1) direct expenses plus an apportioned amount of indirect expenses, or 2) 40% of investment income. The New York State Tax Department will not be able to override the election, which can be made at any time, even on an amended return.
* The business income base will still include IRC section 78 gross-up dividends.
New York City. New York City is substantially conforming to New York State's rules as they pertain to the conversion of the ENI base to the business income tax base. There are some minor differences.
Net Operating Loss Deduction
New York State. The net operating loss (NOL) deduction will now be deductible postapportionment instead of preapportionment. All NOL carry-forwards from years prior to 2015 must be recomputed based on the new rules so that they can appropriately be applied against income after apportionment. Furthermore, an NOL earned in 2015 or later cannot be carried back to a year before 2015.
New York City. New York City is conforming to New York State's NOL deduction.
Capital Tax Base
New York State. As of January 1, 2016, New York State is phasing out the capital tax base over a six-year period. The tax base will be fully eliminated in 2022.
New York City. New York City is not phasing out the capital tax base. Instead, the maximum tax will be increased to $10 million. New York City will now allow a $10,000 credit against the capital tax.
New York State. New York State repealed the bank tax. Corporations that were subject to the bank tax will now be taxable under the new corporation tax rules.
New York City. New York City also repealed the bank tax.
New York State. The Metropolitan Transit Authority (MTA) surcharge is now permanent and the tax rate has been increased from 18% to 25.6%. License taxes and maintenance fees imposed on foreign corporations have been repealed. The alternative minimum tax (AMT) has been repealed.
New York City. The single receipts factor apportionment will continue to be phased in, and New York City will be a single sales factor jurisdiction in 2018. Taxpayers with less than $50 million of receipts apportioned to the city will have the option to make a one-time, one-year election to continue using the 2017 weighted three-factor formula for the 2018 tax year in lieu of the single sales factor. The AMT base for income plus compensation has been eliminated. Any credits and incentives received under the old general corporation tax rules will be transitioned to the new corporate tax mies. Credits that were allowed under the old general corporation tax from prior years to the 2015 tax year are allowed to be carried forward to the new corporate tax. The unincorporated business tax (UBT) credit has been modified to take into account the elimination of the alternative income plus compensation base as well as the varying tax rates that have been implemented for manufacturers and small businesses.
Patrick Duffany, CPA, is a partner, Corey Rosenthal, JD, is a principal, Peter Rabinowitz, JD, is a director, and Arvinder Kaur, CPA, is a state and local tax practice leader, all at CohnReznick LLP, New York, NY.
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|Title Annotation:||Columns: state & local taxation|
|Author:||Duffany, Patrick; Rosenthal, Corey; Rabinowitz, Peter; Kaur, Arvinder|
|Publication:||The CPA Journal|
|Date:||Jul 1, 2015|
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