The New York State Budget and What it Means
June 04, 2014
New York State Tax Law has undergone significant changes due to the 2014 New York State Budget. The link below will take you to a detailed listing 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:
- 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% 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;
- Implementing a single receipts apportionment factor using customer based sourcing rules for all taxpayers;
- 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;
- Allowing a three-year carry back of net operating losses (NOLs) incurred in tax years 2015 and after; and
- Merging Article 32 (Bank Franchise Tax) into Article 9-A (Corporate Franchise Tax)
At first, it may appear that these changes are welcome news for New York corporations. However, it should be noted that some of the Tax Law changes create new concerns. The reduction in the corporate rate will be offset by the increase in the MTA surcharge (at least for those entities operating within the New York City area). And while the move to 100% receipts factor apportionment may create a tax benefit for some corporations, for others it will potentially be detrimental. Thus, for most taxpayers, it is difficult to predict whether the net result will be positive or negative.
It's worth noting that the changes will render obsolete many previous planning techniques. As an example, 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.