New York State corporation tax reforms of 2014
Sweeping tax legislation enacted
This spring, New York enacted sweeping tax legislation that changes many aspects of its state tax law. In this article, Russell Banigan, Kenneth Jewell, and Mary Jo Brady, of Deloitte Tax LLP, discuss New York’s current tax provisions and explain the major changes coming to the state’s corporate franchise tax in 2015.
Understanding the major changes
Among the major changes discussed are the unification of Article 32 (Franchise Tax on Banking Corporations) into Article 9-A (Franchise Tax on Business Corporations) and the modifications to the net income tax base, the state’s move to a bright-light statutory nexus threshold to determine whether out-of state corporations are subject to corporate franchise tax and apportionment and combined reporting reforms.
Summary of major reforms
The major elements of the New York state corporation tax reforms are as follows:
- Eliminating the Banking Corporation Tax (Article 32) so that banking corporations will now be taxed under the Corporate Franchise Tax (Article 9-A)
- Reducing the tax on entire net income to 6.5 percent (for taxable years starting on or after Jan. 1, 2016), with that rate being set at zero percent for qualiﬁed New York manufacturers (for taxable years beginning on or after Jan. 1, 2014) and 5.9 percent for qualiﬁed emerging technology companies (‘‘QETC’’) (for taxable years beginning in 2014, with the rate declining until it is 4.875 percent for taxable years beginning on or after Jan. 1, 2018)
- Scheduling a phase-out of the alternative tax on business capital, which is set at 0.15 percent for taxable years beginning before Jan. 1, 2016, and then gradually reduced until the rate is zero percent for taxable years beginning on or after Jan. 1, 2021 (there is a separate phase-out for ‘‘qualiﬁed New York manufacturers,’’ though the zero rate is obtained at the same time as for other taxpayers)
- Increasing the maximum amount of alternative tax on business capital from $1 million to $5 million (for qualiﬁed New York manufacturers, the maximum tax is $350,000)
- Repealing the alternative tax on minimum taxable income (AMT)
- Increasing the alternative ‘‘ﬁxed’’ minimum tax to $200,000 for taxpayers with New York gross receipts over $1 billion (this is also applied to each member of the New York combined group, other than the parent, with New York gross receipts of $10,000 or more)3
- Adopting broad-based bright-line statutory nexus thresholds
- Changing the starting point in calculating New York entire net income for non-US corporations with New York nexus from worldwide taxable income to federal ‘‘effectively connected income’’ (‘‘ECI’’), determined without regard to tax treaties (note: non-US corporations with ECI are included in the combined return if they otherwise satisfy the combined return requirements enacted as part of these tax reforms)
- Changing the apportionment formula to provide for customer (market) sourcing rules for selling digital products, providing ﬁnancial services, and licensing intangible property (in particular, with respect to sourcing royalties from various types of intangible property and other services)
- Adopting water’s-edge unitary combined reporting (and eliminating the need for substantial intercorporate transactions or the existence of distortion as a requirement for combination)
- Limiting what constitutes investment capital and investment income (generally, dividends and gains from stock in non-unitary corporations held for more than six months, and income that New York is prohibited from apportioning as business income under US Constitutional principles), and exempting investment capital and investment income from taxation
- Eliminating the additional tax on subsidiary capital and eliminating most exclusions for income from subsidiaries, while retaining an exemption for dividends and ‘‘exempt CFC income’’ (as deﬁned in Internal Revenue Code, ‘‘I.R.C.’’ § 951(a)) from unitary subsidiaries
- Limiting the attribution of expenses against exempt income to interest expense and creating a safe harbor election whereby aggregate nontaxable investment and exempt income is reduced by a ﬂat 40 percent in lieu of being subject to interest expense attribution
- Providing that investment income is also reduced by losses, deductions and expenses of transactions that serve as hedges against losses from investment capital
- Changing the net operating loss (‘‘NOL’’) provisions from a pre-apportionment to a post-apportionment computation, ending the requirement that the NOL be limited to the amount of corresponding federal NOL usage, and providing transition rules for converting NOL deductions arising in pre-tax reform taxable years for use in subsequent taxable years4
- Providing a three-year carryback period for NOLs incurred in post-reform taxable years, provided that no NOL can be carried back to a taxable year beginning before Jan. 1, 2015 (carryforward period remains 20 years)
- Modifying the Metropolitan Transportation Authority (‘‘MTA’’) Surcharge on New York franchise tax to provide a bright-line statutory nexus threshold and increasing the MTA Surcharge rate to 25.6 percent for taxable years beginning on or after Jan. 1, 2015, and before Jan. 1, 2016 (and the rate thereafter is subject to annual adjustment as determined by the tax commissioner in accordance with the state’s ﬁnancial projections)
- Continuing three-factor apportionment5 for determining business activities in the MTA Surcharge area, while adjusting the MTA receipts factor to reﬂect new customer (market) sourcing provisions, and
- Modifying the MTA Surcharge applicable to the amount of New York franchise tax before the application of tax credits
3 For ‘‘qualified New York manufacturers’’ and emerging technology companies, the maximum ‘‘fixed’’ minimum tax is $4,500 (at $25 million of New York receipts) for taxable years beginning before Jan. 1, 2015, and is scheduled to gradually decline to a maximum of $3,750 for taxable years beginning on or after Jan. 1, 2018.
4 Generally, the prior net operating loss conversion subtraction in a taxable year is limited to 1/10th of the entire prior NOL conversion pool, plus any portion of the 1/10th subtraction not used in a preceding taxable year. However, taxpayers may elect to take a subtraction equal to one-half of the pool for taxable years beginning in 2015 and 2016. The election is made on taxable return for the tax year beginning in 2015.
5 With respect to the MTA Surcharge property factor, property is valued at adjusted basis used for federal income tax purposes. However, taxpayers can make a revocable election on their first tax return due on or after Jan. 1, 2015, to use fair market value in lieu of adjusted basis.