The New York State Budget and What it Means for Financial Institutions
The 2014 New York State Budget has enacted sweeping changes to the New York State Tax Law. Many of these changes specifically impact financial institutions. The link below will take you to a detailed description of the new provisions. In brief summary form, the major corporate tax reform changes for tax years beginning on or after January 1, 2015 are as follows:
- Merging Article 32 (Bank Franchise Tax) into Article 9-A (Corporate Franchise Tax);
- Eliminating the deposits and payroll factors previously applicable to Article 32 apportionment;
- Implementing a single receipts apportionment factor for both banks and corporations using customer-based sourcing rules for all taxpayers;
- Sourcing interest on loans to the borrower's location; interest on secured real property to the location of the property;
- Providing an election to source receipts from Qualified Financial Instruments marked to market at 8%;
- Lowering the business income base tax rate from 7.1% to 6.5% (for tax years beginning on or after January 1, 2016);
- Reducing the business income base rate for qualified manufacturers to 0% (this provision is effective for tax years beginning on or after January 1, 2014);
- Repealing the alternative minimum tax base;
- Phasing out the capital base tax over six years;
- Increasing the MTA Surcharge and making it permanent;
- Adopting full unitary water's-edge combined reporting with an ownership requirement of more than 50%;
- Creating an "economic nexus" standard;
- Treating subsidiary capital and income as taxable;
- Narrowing the current definition of investment capital and investment income and completely exempting both from tax;
- Creating a new "other exempt income" category of income;
- Converting existing Net Operating Losses (NOLs) into a prior NOL "conversion subtraction pool" to stabilize their value for financial accounting purposes, and simplifying the rules for NOLs incurred in tax years beginning on or after January 1, 2015; and
- Allowing a three-year carry back of NOLs incurred in tax years beginning January 1, 2015 and after.
While at first it may appear that these changes are welcome news for New York financial institutions, it should be noted that some of the Tax Law changes create new complexities. For example, whereas banking corporations currently source interest on loans to the location where the preponderance of the servicing of the loan occurred, under the new law, the interest on loans secured by real property is sourced to the location of the real property and interest on other loans is sourced to the location of the borrower. Receipts factor apportionment may create a relative benefit for some banking corporations and a relative detriment for others. Thus, for most taxpayers, it is difficult to predict whether the net result will be positive or negative.
Worth noting is that New York State's changes will render obsolete many previous planning techniques. For instance, for combined groups, if any one corporation has at least $10,000 of New York receipts, and the aggregate New York receipts of all members of the combined group exceed $1 million, the group has a State filing obligation. Further, the NOLs that particular members of a group have calculated may change. NOLs will now be computed on a post-apportionment basis, and a taxpayer's degree of presence in New York in the year the NOL is generated will directly affect the amount of NOL available to be carried forward. Subsidiary capital is now taxable, with the sale of a subsidiary (within a unitary business model) potentially resulting in taxable gain.
Much remains to be implemented by regulations and policy pronouncements. Also, New York City has yet to conform to the State changes. Basic questions (such as the definition of "unitary") remain subject to interpretation. As the Tax Law changes are implemented, please consult with your state and local tax professional with any questions. For additional information on the summary changes listed above, as well as more detail regarding a number of tax credits which have been created, please refer to our webpage on the Updated New York State Tax Budget.