April 3, 2018 New York legislature sends governor budget legislation addressing state and city tax effects of federal income tax reform, among other provisions On March 30, 2018, the New York State (NYS) Legislature passed the New York FY 2018-19 budget bill (A.9509-C/S7509-C) (Final Bill). The Final Bill was delivered to Governor Cuomo for signature on April 2, 2018. The Final Bill includes some of the provisions that Governor Cuomo proposed in his Executive Budget Bill (Governor's Bill) and some of the provisions included in the NYS Senate and Assembly's versions of the revenue legislation (Senate Bill and Assembly Bill, respectively). Several of the key provisions in the Final Bill amend the NYS Tax Law and the personal and business income tax provisions of the New York City (NYC) Administrative Code to address some of the tax issues created by the enactment of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) due to the state and city's rolling conformity to the federal tax law. The Final Bill contains the following provisions, among others: — Part H, which extends the statute of limitations on amended tax returns — Part JJ, which addresses decoupling from certain personal income tax (PIT) provisions of the TCJA — Part KK, which addresses various provisions of the TCJA impacting Article 9-A (NYS corporate franchise tax), Article 33 (NYS tax on insurance companies) and the NYC Corporation Tax — Part LL, which addresses the establishment of government sponsored charitable contribution funds ostensibly to alleviate the effects of the $10,000 annual limitation on the federal state and local tax deduction wrought by the TCJA — Part MM, which imposes a new employer compensation expense tax (ECET) Attached is a comparison schedule comparing key tax provisions in the Governor's Bill, the Senate Bill and the Assembly Bill, and the Final Bill as passed by the legislature showing whether a similar amendment to the New York City Administrative Code was adopted as part of the Final Bill. Part H - Extension of the statute of limitations on amended tax returns Part H of the Final Bill extends the statute of limitations, for NYS and NYC personal income tax and business tax purposes, to allow an assessment of tax, including recovery of a previously paid refund, attributable to a change or correction on an amended return any time within one year after such amended return is filed. The Governor's Bill included this provision as well but provided for an extension period of three years as opposed to the more limited one-year period, which is in the Final Bill. The provisions in this Part are effective immediately and apply to amended returns filed on or after the effective date of the Final Bill. Part JJ — Personal income tax provisions affected by the TCJA Part JJ of the Final Bill decouples the NYS Tax Law and NYC Administrative Code from certain personal income tax provisions of the TCJA. As originally proposed in the Governor's Bill, the Senate Bill and the Assembly Bill, the Final Bill: (1) restores the NYS and NYC single filer standard deduction; (2) decouples from the alimony and moving expense limitation imposed under the TCJA; (3) looks to the allowable itemized deductions at the federal level that were available prior to the enactment of the TCJA,1 except to the extent there is already a NYS or NYC modification; and (4) allows taxpayers to itemize deductions for NYS and NYC purposes even if the taxpayer claimed a standard deduction for federal income tax purposes. The provisions in this Part are effective immediately upon enactment and apply to tax years beginning on or after January 1, 2018. Part KK — Corporate tax provisions affected by the TCJA Part KK of the Final Bill addresses only some of the corporate and international tax provisions of the TCJA as they affect business taxes as follows: — Exempt controlled foreign corporation (CFC) income - The Final Bill includes provisions under both the NYS Tax Law and the NYC Administrative Code to treat as "exempt CFC income" amounts included in federal gross income pursuant to IRC Section 951(a) by reason of IRC Section 965(a) (as adjusted by IRC Section 965(b)) but without any adjustment for IRC Section 965(c) (which implements the so called "transition tax"). However, the amounts must be received from a corporation that is not included in a combined report with the taxpayer, regardless of whether the United States shareholder and the CFC the shares of which it owns are engaged in a unitary business. In addition, the Final Bill provides that the IRC Section 965-related exempt CFC income does not constitute investment income.2 — IRC Section 78 subtraction modification — The Final Bill amends the current subtraction modification in the NYS Tax Law and NYC Administrative Code related to IRC Section 78 to limit the subtraction to dividends that are not deducted under IRC Section 250. — IRC Section 965(c) deduction — The Final Bill amends the NYS Tax Law and NYC Administrative Code to provide a new addition modification for the amount of the IRC Section 965(c) deduction, to avoid a potential "double deduction" (i.e., the IRC Section 965(a) income inclusion will be treated as exempt income for NYS and NYC tax purposes and, thus, should not allow a taxpayer to claim the deduction against income, which is otherwise treated as exempt for NYS and NYC tax purposes). — Foreign derived intangible income (FDII) deduction — Unlike the Governor's Bill, the Senate Bill and the Assembly Bill, the Final Bill includes a new addition modification for the amount of any federal deduction allowed pursuant to IRC Section 250(a)(1)(A) (i.e., the FDII deduction).3 In effect, this provision disallows a FDII deduction for NYS or NYC tax purposes. — Underpayment of estimated tax penalties - Under the Final Bill, NYS Tax Law Section 1085(c)(1) and NYC Administrative Code Section 11-676.3 are amended to provide, for tax years beginning on or after January 1, 2017 and before January 1, 2018, relief from estimated tax penalties with respect to the portion of tax related to the amount of interest deductions directly or indirectly attributable to the IRC Section 965-related exempt CFC income or the 40% reduction of such exempt CFC income in lieu of interest attribution if the 40% safe harbor election is made. The provisions in Part KK are effective and apply to tax years beginning on and after January 1, 2017. Part KK of the Final Bill does not include various provisions that had been included in the Senate Bill: — In particular, provisions that would have treated global intangible low-tax income (GILTI) under IRC Section 951A as exempt CFC income for NYS and NYC tax purposes were not included in the Final Bill and, thus, GILTI income will be treated as taxable in New York, subject to the applicable deduction set forth in IRC Section 250(a)(1)(B) (i.e., 50% through tax years beginning before January 1, 2025 and 37.5% for tax years beginning on or after January 1, 2025). — Additionally, the Final Bill does not include provisions allowing for a NYS and NYC subtraction modification for FDIC premiums disallowed as deductions under IRC Section 162(r). — Finally, the provisions that would have decoupled NYS and NYC from the IRC Section 163(j), which limits the business interest expense deduction to not more than the taxpayer's business interest income plus 30% of its adjusted taxable income, were not included in the Final Bill. Part LL — Creation of government-sponsored charitable gift trust funds As in the Governor's Bill, Part LL, which was added to address the limitation on the state and local tax (SALT) deduction for individuals under the TCJA, amends 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. One would be designated the "health charitable account" and the other the "elementary and secondary education charitable account." Also, as in the Governor's Bill, Part LL adds new Section 606(iii) to the NYS Tax Law, which allows, for tax years beginning on or after January 1, 2019, an individual taxpayer to claim a tax credit against his or her PIT in an amount equal to 85% of the sum of the amount contributed by the taxpayer during the immediately preceding tax year to any or all of the "charitable gift trust funds." A similar credit is allowed for qualified contributions made to Health Research, Inc., the State University of New York Impact Foundation or the Research Foundation of the City University of New York. Lastly, Part LL adds new Section 980-a to the NYS Real Property Tax Law, allowing any municipal corporation that establishes a similar charitable gift trust fund to authorize a property tax credit for contributions made to such funds. Under this provisions, the owners of real property will be permitted to claim a credit against the real property taxes due to a participating municipal corporation in the amount of 95% (or a lesser percentage as determined by the municipality) 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. Part MM — Employer Compensation Expense Tax As in the Governor's Bill, the Final Bill includes Part MM, which allows employers to opt into the new ECET that is intended to protect New York individual taxpayers from increased federal income taxes resulting from the federal SALT deduction cap. Covered employees can then apply an individual income tax credit against their New York PIT related to the amount paid by the employer under the ECET (but not dollar for dollar). Employers opting into the ECET cannot 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. The Final Bill clarifies that an employer can elect into the new ECET on an annual basis. The employer's election must be made on or before December 1 of each calendar year in order to be effective for the immediately succeeding calendar year.4 Other notable provisions in the Final Bill Other notable provisions in the Final Bill include the following: — Part K — Providing for information sharing between the department of taxation and finance and the comptroller regarding unclaimed funds — Part R — With respect to the youth tax credit, establishing through amendments that a qualified employer shall be entitled to a tax credit equal to $750 per month for up to six months — Part X - Providing relief to certain limited partners of limited partnerships (but not limited liability partnerships) and members of limited liability companies from personal liability for the entire sales and use tax liability of the business if they meet certain eligibility requirements — Part PP — With respect to the state low-income housing credit, amending the public housing law and tax law relating to the procedures and documentation required in order for a transferee to be eligible for the state low-income housing tax credit; this Part also discusses how the credit is to be allocated and discusses liabilities and obligations with respect to the tax credits — Part RR — Amending various provisions relating to the credit for rehabilitation of historic properties, for the NYS personal income tax, Article 9-A and Article 33 taxpayers — Part SS — with respect to "taxable income" of NYC residents, amending various provisions in the NYS Tax Law and the NYC Administrative Code regarding the determination of a NYC Resident's NYC "taxable income" when contributions are made to the NYS charitable gift trust funds set forth in Part LL of the Final Bill, discussed above, to the extent such contributions are claimed as itemized deductions — Part EEE — Requiring the NYS Tax Department "to set up an online application system for taxpayers to submit claims for reimbursements of payments of interest on fixed and final determinations of underpayments of federal tax liability for the 2019, 2020 and 2021 tax year that arise from the taxpayer's reliance on amendments to the tax law enacted in the year 2018" — Part NNN — Enacting new NYS Tax Law Article 29-C, titled "Congestion Surcharge," on for-hire vehicles operating below 96th Street in Manhattan; the surcharge is $2.75 for for-hire vehicles, $2.50 for yellow cabs, and $0.75 for pooled trips Provisions notably absent from the Final Bill As indicated above, the Final Bill includes only some of the provisions that were proposed in the Governor's Bill, the Senate Bill and the Assembly Bill. In addition to the provisions notably absent in Part KK (discussed above), the following provisions, among others, were not included in the Final Bill: — Closing the carried interest loophole — Providing the Department of Taxation and Finance a right to appeal adverse decisions of the Tax Appeals Tribunal (under current law, decisions adverse to the Department cannot be appealed by the Department) — Deferring certain business related tax-credit claims — Imposing an Internet Fairness Conformity Tax in lieu of the sales and use tax on remote sellers to New York consumers — Increasing PIT rates — Imposing certain business tax surcharges Implications Considering that the Final Bill was presented to Governor Cuomo on April 2, 2018, we expect that he will sign the bill in the coming days, making the above changes a second quarter event for calendar year taxpayers. Taxpayers should be aware, however, that several of the provisions have retroactive effect (e.g., the effective date for Part KK (dealing with corporate tax conformity to certain provisions of the TCJA) is retroactive to tax years beginning on or after January 1, 2017. Every New York State or City taxpayer should model out the impact of these changes and consider them in preparing their NYS and NYC 2017 extensions and 2018 estimated tax payments. Taxpayers should monitor legislative activity in other jurisdictions, which may closely follow New York's tax law changes, especially those changes that address the impacts of the federal TCJA provisions. It is also widely expected that many of the TCJA conformity provisions in the Tax Law will be revisited during the remainder of the legislative session as businesses continue to address the state impacts of the TCJA on their New York business activity. ———————————————
——————————————— 1 For example, 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. 2 The Final Bill also includes various similar amendments to Article 33 relating to IRC Section 965 for insurance companies. 3 The Final Bill also includes the same addition modification under Article 33 applicable to insurance companies. 4 The Governor's Bill required that the election be made on or before October 1 of each calendar year to be effective for the immediately succeeding calendar year. ——————————————— Comparison Chart for NYS C 18-19 Budget Process
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