Perspectives

Proposed New York State tax changes contained in governor's 2015-16 budget

Multistate tax alert | February 11, 2015

This alert summarizes the more significant New York State tax reform proposals included in the 2015-2016 Executive Budget, which New York State Governor Andrew Cuomo presented on January 21.

2015-2016 New York State Executive Budget

Overview

On January 21, 2015, New York State Governor Andrew Cuomo presented the 2015-2016 New York State Executive Budget, which includes proposed technical corrections to the New York State tax reform provisions enacted in 2014,1 changes to the sales tax, and other proposals. The 2015-2016 Budget also includes broad-based reform of the New York City corporate tax regime, the proposed provisions of which are generally consistent with the New York State tax reform provisions enacted in 2014. This tax alert summarizes the more significant New York State tax reform proposals included in the Executive Budget.2

Proposed technical corrections and other revisions to the 2014 New York State tax reform

The more significant proposed technical corrections and other revisions to the New York State Tax Reform provisions enacted in 2014 include the following:

  • Clarifying that, in order to qualify as investment capital, stock must never have been used by the taxpayer in the regular course of the taxpayer’s business
  • Clarifying that the presumption that stock acquired in the second half of the taxable year would satisfy the required holding period to be considered investment capital would not apply if the taxpayer in fact does not own the stock when it files its original tax return for the taxable year in which it acquires the stock
  • Removing the subtraction of hedging losses and expenses from the computation of nontaxable investment income, (the original provision essentially would have disallowed those expenses)
  • Clarifying that, for purposes of computing the residential and small business loan subtraction modification for certain community banks and small thrifts, the $8 billion asset qualifying test for a combined group applies if the taxpayer is included in a combined report and the assets of the combined group do not exceed $8 billion and clarifying generally that the modifications for certain community banks and small thrifts do not reduce the numerator and denominator of the apportionment fraction
  • Clarifying that only unitary group members are considered in applying the aggregate bright-line economic nexus tests; in other words, only the New York receipts of $10,000 or more of unitary group members would be aggregated to determine whether the $1 million or more bright-line nexus threshold is met
  • Clarifying that, for purposes of qualifying as a “qualified New York manufacturer” (for a 0% tax rate on the business income base), a combined group filing a combined report would be required to meet the “principally engaged” test on a combined basis
  • Limiting the type of New York property required in order to qualify as a qualified New York manufacturer (under one of the two statutory tests) to New York ITC property that is “principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing,” whereas the New York property requirement previously had been satisfied with any New York ITC property (such as research and development property)
  • Clarifying that each corporation in a combined group must qualify as a qualified emerging technology company (“QETC”) for the reduced QETC rates to apply
  • Providing that the investment tax credit applicable to certain financial institutions may not be taken for property first placed in service on or after October 1, 2015, and restoring to the statute providing such credit, language permitting the aggregation of use by certain affiliates to meet the statutory use requirement
  • Establishing a capital base rate of 0.132% for tax years beginning in 2015 for qualified New York manufacturers and QETCs and adding new fixed dollar minimum tables for S corporations that are manufacturers or QETCs
  • Clarifying that the deduction related to pre-2015 net operating losses (the Prior Net Operating Loss Conversion “PNOLC” subtraction) can be claimed only until the calculated pool of pre-2015 net operating losses is exhausted, and, except where the taxpayer elects to use its entire pool of pre-2015 net operating losses in 2015 and 2016 (as elected on its first return for the 2015 tax year), the taxpayer may carry forward the PNOLC subtraction pool for no longer than 20 taxable years or until the 2035 tax year, whichever comes first
    • Clarifying that an NOL must be carried back to the earliest year first; and providing that a taxpayer may make an irrevocable election on an original return (a separate election for each loss year) to waive the entire carryback period
  • Amending the apportionment provisions:
    • Broadening the definition of “qualified financial instrument” by including those financial instruments eligible or required to be marked to market under I.R.C. §§ 475 or 1256 (as opposed to those actually marked to market by the taxpayer)
    • Deleting “the location of the treasury function of the business entity” as the first level in the hierarchy for purposes of determining commercial domicile in sourcing receipts from financial transactions
    • Adding apportionment provisions for marked-to-market net gains, receipts from the operation of vessels and qualified air freight forwarders
    • Clarifying that a loan is “secured by real property” if 50% or more of the collateral used to secure the loan (based on fair market value at the inception of the loan) consists of real property
    • Eliminating the requirement that the designated agent of a combined group, which acts on behalf of the members of the group relating to the combined report, must be the parent corporation

These proposals would be effective as if originally enacted as part of the 2014 Tax Reform, which generally would be for tax years beginning on or after January 1, 2015. Based on this effective date language, however, the amendments to the provisions determining the qualifications of a qualified New York manufacturer (for purposes of the zero tax rate on business income) may be retroactive to taxable years beginning on or after January 1, 2014.

1 Our April 1, 2014 Tax Alert summarizing the 2014 New York State law changes is available here.

2 In this Tax Alert we do not address the related New York City corporate tax reform proposals. Our January 23, 2015, Tax Alert summarizing the New York City proposals is available here.

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