In the 30-day amendments to his Executive Budget Legislation (released February 15, 2018), Governor Andrew Cuomo addressed some of the New York State (NYS) personal and business income tax issues created by the enactment of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). The amendments, many of which stem from recommendations in a recently released report by the New York State Department of Taxation and Finance (Department) titled "Preliminary Report on the Federal Tax Cuts and Jobs Act" (Preliminary Report), include:

— New Part JJ, which addresses decoupling from certain individual income tax provisions of the TCJA
— New Part KK, which addresses Article 9-A corporate tax provisions related to the federal deemed repatriation under Section¹ 965 of the Internal Revenue Code of 1986, as amended (IRC)
— New Part LL, which addresses the establishment of charitable contribution funds
— New Part MM, which imposes a new employer compensation expense tax

Part JJ of the 30-Day Amendments would decouple NYS's Personal Income Tax (PIT) from certain individual income tax provisions of the TCJA. For example, Part JJ contains the following provisions:

Restoring the NYS and NYC single filer standard deduction

The 30-Day Amendments would adjust N.Y. Tax Law Section 614(a) and N.Y.C. Admin. Code Section 11-1714 by allowing resident individuals to take the $7,500 standard deduction if they are not: (1) claimed as a dependent by another NYS taxpayer, (2) married, (3) head of the household, or (4) a surviving spouse.

Alimony provisions

The 30-Day Amendments would decouple from the federal alimony provisions by adding new N.Y. Tax Law Section 612(w) and new N.Y.C. Admin. Code Section 11-1712(u), which would both allow as a subtraction modification to federal adjusted gross income (AGI) any amounts paid as alimony and separate maintenance payments and require an addition modification to federal AGI for any amounts received as alimony or separate maintenance payments during the tax year for NYS and NYC purposes.

Qualified moving expense

The 30-Day Amendments would decouple from the federal qualified moving expense provisions by adding new N.Y. Tax Law Section 612(x) and new N.Y.C. Admin. Code Section 11-1712(v), which both allow as a subtraction modification to federal AGI any qualified moving expense reimbursements received by the taxpayer during the tax year and qualified moving expenses paid by the taxpayer during the tax year for NYS and NYC purposes. The definitions of "qualified moving expense reimbursements" and "qualified moving expenses" would be linked to the IRC definitions as they existed immediately before enactment of the TCJA.

Allowing NYS and NYC itemized deductions if the federal standard deduction is made

The 30-Day Amendments would allow taxpayers to elect to deduct their NYS itemized deductions or claim their NYS standard deduction regardless of whether they claim the itemized or standard deduction at the federal level. NYS and NYC taxpayers would follow the federal itemized deductions allowable immediately before the enactment of the TCJA, except to the extent there is already a NYS or NYC modification. Therefore, it appears that NYS and NYC would allow itemized deductions for interest paid or accrued during the tax year on acquisition indebtedness up to $1 million or home equity indebtedness up to $100,000 and property tax over $10,000. Given that there is already a NYS modification for state income taxes, however, NYS will not allow that itemized deduction.

Part KK of the 30-Day Amendments generally only addresses one aspect of the corporate tax provisions contained within the TCJA — the deemed repatriation or transition tax under IRC Section 965.² Under Part KK, the definition of "exempt controlled foreign corporation (CFC) income" in N.Y. Tax Law Section 208.6-a(b) would be amended to provide two categories of such income:

1. As under the current N.Y. Tax Law, income required to be included in the taxpayer's federal gross income under IRC Section 951(a) received from a corporation that is conducting a unitary business with the taxpayer but is not included in a combined report with the taxpayer

2. A new category of income that, to the extent not already included in Category 1 above, is required to be included in the taxpayer's federal gross income under IRC Section 951(a) by reason of IRC Section 965(a), as adjusted by IRC Section 965(b) and without regard to IRC Section 965(c), if the income is received from a corporation that is not included in a combined report with the taxpayer

In addition, Part KK would:

— Amend the subtraction modification related to IRC Section 78 in N.Y. Tax Law Section 208.9(a)(6) to limit the subtraction modification to such dividends that also are not included in the computation of the IRC Section 250 deduction.
— Amend N.Y. Tax Law Section 208.9(b) to provide a new addition modification for the amount of the IRC Section 965(c) deduction.
— Amend N.Y. Tax Law Section 1085(c)(1) to provide, for tax years beginning on or after January 1, 2017 and before January 1, 2018, relief from an estimated tax penalty with respect to the portion of tax related to: (i) the amount of interest deductions directly or indirectly attributable to the amount included in exempt CFC income under N.Y. Tax Law Section 208.6-a(b)(ii); or (ii) the 40% reduction of such exempt CFC income in lieu of interest attribution, provided the 40% safe harbor election is made.

Parts LL and MM were added to the Governor's Executive Budget Legislation through the 30-Day Amendments to address the limitation on the federal SALT deduction for individuals.

Part LL would amend the state finance law (N.Y. Fin. Law Section 92-gg) by establishing two new "charitable gifts trust fund[s]" in the joint custody of the NYS Commissioner of Taxation and Finance and the NYS State Comptroller. The funds that would be created are: (1) the "health charitable account," moneys to which will be expended for the support of services relating to primary, preventive and inpatient health care, routine dental and vision care, hunger prevention and nutritional assistance, and other services provided to NYS residents; and (2) the "elementary and secondary education charitable account," which would provide for elementary and secondary education for children in the state.

In addition, Part LL would add new Section 606(iii) to the N.Y. Tax Law, which would allow, for tax years beginning on or after January 1, 2019, an individual taxpayer to claim a tax credit against his or her NYS PIT in an amount equal to 85% of the amount contributed by the taxpayer during the immediately preceding tax year to any or all of the "charitable gift trust funds."

Lastly, Part LL would add new Section 980-a to the N.Y. Real Property Tax Law, allowing a municipal corporation that has established one of these "charitable gift trust funds" to authorize a tax credit for contributions to such fund. On or after December 1, 2018, the owner(s) of real property would be allowed a credit against the real property taxes of a participating municipal corporation in the amount of 95% of the amount contributed by one or more of the owners of such property during the "associated credit year" to any or all funds established by such municipal corporation, subject to the limits established by the municipal corporation.

These tax credits would be in addition to a charitable contribution deduction if the taxpayer chooses to itemize his/her deductions for federal and NYS PIT purposes.

Part MM would allow employers to opt into a new Employer Compensation Expense Tax (ECET) that is intended to protect New York individual taxpayers from increased federal income taxes resulting from the SALT deduction cap. Covered employees could then apply an individual income tax credit against their NYS PIT related to the amount paid by the employer under the ECET (but not dollar for dollar). Employers opting into the ECET could not deduct from wages or compensation of an employee any amount that represents all or any portion of the tax imposed on the employer under the ECET. Governor Cuomo mentioned during his press release that employers could also claim a new tax credit to offset their administrative costs, but such a credit did not appear in the 30-Day Amendments. Please see Tax Alert 2018-0371 for an in-depth discussion of the proposed ECET.

Implications

At this time, it is not yet known which, if any, of the Department's recommendations in its Preliminary Report or the Governor's 30-Day Amendments will be acted upon by the NYS Senate and Assembly. Certain provisions raise issues and concerns that NYS is still considering. We will continue to monitor the progress of the legislation and, in particular, those that are related to the federal tax reform, as it moves forward. Interested taxpayers should also consider modeling the tax effect of this legislation and keep abreast of the legislative process.

———————————————

———————————————
ENDNOTES

¹ "Section" refers to the relevant section or sections of the Internal Revenue Code of 1986, as amended, unless stated otherwise.

² The 30- Day Amendments do not address several other business tax provisions of the TCJA that were included in the Department's Preliminary Report, such as the tax treatment of a taxpayer's global intangible low-tax income (GILTI) inclusion under IRC Section 951A; the 100% dividend received deduction allowed under new IRC Section 245A; the 30% business interest expense limitation under IRC Section 163(j); the 100% expensing provisions; and the limitation on the FDIC premiums in IRC Section 162(r).