On January 13, 2016, New York State Governor, Andrew Cuomo, introduced legislation as part of his FY 2016-17 budget (hereinafter, Budget Bill) that proposes technical amendments to New York State and New York City corporate tax reform as previously enacted in 2014 and 2015 (A. 8559-D / S.6359-D; A. 3009-B / S. 2009-B; and S. 4610-A/ A. 6721-A, collectively Tax Reform; see also Tax Alerts 2014-0655; 2015-0667). In addition, the Budget Bill would bring New York State and City's tax filing deadlines into conformity with new federal deadlines, permanently extend tax shelter reporting requirements, and make other changes to State and City tax credits.

Technical amendments to New York State and City corporate tax reform

Qualified Financial Instruments: The Budget Bill would modify the definition of a qualified financial instrument (QFI) for purposes of Tax Reform to exclude stock that generates other exempt income that is not marked to market under IRC Section 475 and 1256 but only to the extent of the income from that stock that is other exempt income. Pursuant to N.Y. Tax Law Section 208(6-a), "other exempt income" includes the "sum of exempt CFC income and exempt unitary corporation dividends." This amendment clarifies that taxpayers would be allowed the exemption for other exempt income for income from stock of its subsidiaries that are not included in a combined report although the taxpayer elects to generally apportion to New York 8% of its income from QFI. While this amendment precludes the sourcing to New York of certain income from stock that generates other exempt income, it maintains the treatment of gains on the sale of such stock (not otherwise exempt) as subject to New York 8% sourcing if any stock owned by the taxpayer is marked to market and the QFI election is made.

Investment Capital: The Budget Bill would correct a typographical error to conform New York City's definition of investment capital to the State's. New York City's definition of "investment capital" would be revised to exclude "stock issued by the taxpayer." (Emphasis added).

Effective Date: Technical amendments to the Tax Reform provisions are deemed to be in full force and effect as of the date of the original legislation (i.e., the tax year 2015 as related to both New York State and New York City.)

Conformity with new federal tax filing dates

The Budget Bill would bring certain New York State and City tax filing deadlines into conformity with federal tax deadlines related to corporations and partnerships. In taxable years beginning on or after January 1, 2016, corporate returns would be due on or before the 15th day of the fourth month after the close of the tax year. In taxable years beginning on or after January 1, 2016, certain partnership returns, excluding partnerships having only nonresident alien partners, would be due on or before the 15th day of the third month after the close of the tax year. These amendments would not affect the due date for the first installment date of estimated tax which remains the 15th day of the third month of the tax year.

Extension of tax shelter reporting requirements

The Budget Bill would permanently extend reporting requirements concerning the disclosure of certain federal and New York State reportable transactions and related information regarding tax shelters.

Various amendments to tax credits

The Budget Bill also would amend various New York State and City tax credits, including the following:

New York State:

— Empire State Commercial Production Creditwould be extended for two years until tax years beginning before January 1, 2019;

— Clean Heating Fuel Credit would be extended three years until tax years beginning January 1, 2020;

— Excelsior Jobs Program would be extended for five years authorizing any unawarded remaining tax credits remaining at the end of tax year 2024 to be allocated in tax years 2025 through 2029;

— Qualified Emerging Technology Company Employment Credit would be amended by revising its definition of the "average number of individuals employed full-time";

— Credit for the Special Additional Mortgage Recording Correction would be amended for a typographical error;

— Certain revisions would be made to the ordering of the credits provisions.

New York City

— Unincorporated Business Tax Credit would be amended to reflect the 9% tax rate imposed on business income from "financial corporations" in contrast to the 8.85% tax rate imposed on non-financial corporations;

— Biotechnology Credit would be allowed for taxable years beginning before January 1, 2019 as opposed to taxable years beginning before January 1, 2016.

Other Notable Changes

— Electronic mandate: Electronic file and payment mandate provisions would be made permanent.

— Small Business Tax Cut: The Budget Bill would reduce the business income base rate for certain small businesses in New York State, and would expand the small business subtraction modification under the Personal Income Tax. For taxable years beginning on or after January 1, 2017, if the business income base is not more than $290,000, the business income base rate would be 4%. The tax rate for such small businesses is currently 6.5%. If the business income base tax is more than $290,000 but not more than $390,000, the business income base tax rate would be between 4% and 6.5% depending on the amount of the business income base in that range.

With respect to the personal income tax, for taxable years beginning on or after January 1, 2017, the small business subtraction modification would be increased from 5% to 15% of net business income included in a taxpayer's federal adjusted gross income. Also for taxable years beginning on or after January 1, 2017, eligible taxpayers who are members, partners or shareholders of an LLC, a partnership or an S corporation that meets the definition of a small business would be able to claim the small business subtraction modification.

Implications

The Budget Bill is subject to further modification prior to its adoption into law. At any time within 30 days of submitting the Budget Bill to the Legislature, the Governor may unilaterally amend or supplement the proposed legislation via the concurrent 21 or 30-day amendment process. After that 30 day period however, the Budget Bill is subject to the Legislature's revisions via the passage of related bills in the Senate and Assembly. Ultimately, the final budget bill will need to be approved by the Senate, Assembly and the Governor. Because the next fiscal year for New York State begins April 1, the goal of the Governor and the Legislature generally is to pass a budget bill by that date.

EY New York tax professionals will continue to monitor the progress of these provisions and any relevant developments as related to New York State and City.

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