April 23, 2020
New York decouples from CARES Act provisions
On April 3, 2020, Governor Cuomo signed into law several Fiscal Year 2020/2021 budget bills, including S. 7508B / A. 9508B (the Budget Bill). The Budget bill changes how both New York State (NYS) and New York City (NYC) treat the IRC Section 163(j) limitation on business interest expense (BIE) deductions as modified by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act) for both corporate and personal income tax purposes (as well as unincorporated business tax (UBT) purposes in NYC). It also effectively transforms NYS and NYC into "fixed date" conformity jurisdictions but only for NYS and NYC personal income tax purposes (not NYS or NYC corporate tax purposes). Consequently, subsequent changes to the federal income tax law affecting individuals will not automatically be incorporated into NYS or NYC personal income tax law in the future without express legislative action.
IRC Section 163(j) as modified by the CARES Act
Prior to enactment of the CARES Act, the IRC Section 163(j) BIE limitation generally denied a deduction for business interest expense that exceeded 30% of adjusted taxable income (ATI), plus any business interest income. Section 2306 of the CARES Act amended the IRC Section 163(j) BIE limitation in two ways. First, it allows taxpayers, for tax years beginning in 2019 or 2020, to increase the 30% ATI limitation to 50% (although they can elect not to apply the higher 50% limitation). Second, taxpayers may elect to use their ATI for the 2019 tax year (in lieu of their ATI for the 2020 tax year) in calculating their IRC Section 163(j) BIE limitation for the 2020 tax year. If the additional deduction yields negative tax consequences for another tax provision (such as the federal base erosion anti-abuse tax under IRC Section 59A (BEAT)), taxpayers can elect not to apply the increased IRC Section 163(j) percentage limitation.
NYS and NYC treatment of IRC Section 163(j)
Corporate franchise tax
For corporate franchise tax purposes, both NYS and NYC conform to IRC Section 163(j) as enacted by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Part WWW of the Budget Bill effectively decouples NYS and NYC corporate franchise tax law from some of the changes to IRC Section 163(j) made by the CARES Act. Specifically, NYS's Article 9A on the corporate franchise tax now determines entire net income (ENI) for tax years beginning in 2019 and 2020 without increasing the federal BIE deduction limitation to 50% of ATI (from 30%) as allowed by IRC Section 163(j)(10)(A)(i).1
The Budget Bill only references IRC Section 163(j)(10)(A)(i); thus, it does not decouple from IRC Section 163(j)(10)(B), which allows taxpayers to elect to use their ATI for the 2019 tax year (in lieu of their ATI for the 2020 tax year) in calculating their IRC Section 163(j) limitation for the 2020 tax year. The NYC Business Corporation Tax (BCT) law, the NYC UBT law and the NYC General Corporation Tax (which generally applies to S corporations that are not recognized by NYC and not subject to the NYC BCT) were amended in the same way as the NYS corporate franchise tax law.2
Personal income tax
Before the TCJA's enactment, NYS and NYC automatically conformed to IRC changes for personal income tax purposes. NYS effectively allowed taxpayers to elect to decouple from the TCJA by using an NYS itemized deduction that excluded TJCA-related changes to the IRC. Thus, NYS taxpayers electing to use the NYS itemized deduction instead of their federal itemized deduction for tax years beginning on or after January 2018,3 could generally deduct 100% of their BIE because the IRC Section 163(j) limitation enacted under the TCJA did not apply.4
Part WWW of the Budget Bill specifically decouples NYS personal income tax law from any amendments made to the IRC enacted after March 1, 2020, for tax years beginning before January 1, 2022.5 As a result, the taxpayer-favorable changes that the CARES Act made to IRC Section 163(j)'s BIE limitation will not apply for those NYS personal income taxpayers who claim the federal itemized deduction instead of electing the NYS itemized deduction. Rather, those taxpayers will still have their BIE deductions limited to 30% of ATI and may not substitute their 2019 ATI on 2020 returns, as allowed by the CARES Act, in computing the BIE limitation. NYS personal income taxpayers interested in avoiding these limitations on BIE deductibility may elect to use the NYS itemized deduction (subject, of course, to any pre-TCJA limitations that still apply).
Like the IRC Section 163(j) changes, none of the other changes enacted under the CARES Act apply for NYS personal income tax purposes, regardless of whether an individual elects an NYS itemized deduction. By decoupling from the CARES Act, the Budget Bill effectively makes NYS a "fixed date" conformity state for NYS personal income tax purposes for IRC provisions enacted on or after March 1, 2020, for tax years beginning before January 1, 2022.
The Budget Bill decouples the NYC resident personal income tax law from the provisions of the CARES Act and the TCJA in the same complex manner used for NYS personal income tax purposes. Like NYS, NYC effectively becomes a "fixed date" conformity jurisdiction for purposes of its personal income tax law for IRC provisions enacted on or after March 1, 2020, for tax years beginning before January 1, 2022.6
These changes took immediate effect.
As a result of these changes, NYS and NYC will conform to the IRC differently for purposes of their corporate income taxes (and NYC UBT) on one hand and their personal income taxes on the other.
For corporate income tax (and NYC UBT) purposes, NYS and NYC continue to conform to the IRC on a rolling basis. Consequently, changes to the IRC automatically will be incorporated into these tax laws unless the NYS or NYC corporate tax law has already decoupled from the particular IRC provision.
For personal income tax purposes, NYS and NYC will now temporarily conform to the IRC as it existed as of March 1, 2020 (i.e., none of the changes to the IRC brought about by the CARES Act have been incorporated into NYS or NYC personal income tax laws and no subsequent changes to the IRC will be incorporated into those laws unless the legislature expressly incorporates any such future amendments). Thus, future changes to the IRC will not automatically be incorporated for either NYS or NYC personal income tax purposes and the state/city will have to take legislative action in order to conform to any future changes made to the IRC.
For individuals choosing between federal itemized deductions and an NYS or NYC itemized deduction, New York's decision to decouple from the CARES Act through the Budget Bill likely makes the NYS or NYC itemized deduction more desirable.
Given that the Budget Bill was signed into law on April 3, 2020, these changes will be considered a second-quarter event for financial statement purposes for calendar-year taxpayers. Taxpayers should also consider these changes in preparing NYS and NYC corporate and personal income (and NYC UBT) tax returns, amended returns, estimated tax payments and planning.
Although few tax law changes were in the Budget Bill (or, for that matter, in the New York legislative session thus far), it is likely that additional revenue-raising bills will be introduced in response to the significant budget shortfalls already anticipated in NYS and NYC due to the economic and governmental strains created by the COVID-19 emergency. As such, it will be important for taxpayers to monitor these developments in New York in the weeks and months ahead.
1 Budget Bill, Part WWW, Section 1 (adding new subparagraph (26) to N.Y. Tax Law Section 208.9(b) (NYS corporate franchise tax)).
2 Budget Bill, Part WWW, Section 3 (adding new subparagraph (22) to NYC Admin. Code Section 11-652.8(b) (NYC corporate tax law)); Section 5 (adding new paragraph 17 to N.Y.C. Admin. Code Section 11-506(b) (NYC UBT tax law)); and Section 6 (adding new subparagraph (21) to N.Y.C. Admin. Code Section 11-602(b) (NYC general corporation tax), respectively).
3 N.Y. Tax Law Section 615.
4 See e.g., N.Y. Tax Law Section 615(a) ("The New York itemized deduction of a resident individual means the total amount of his or her deductions from federal adjusted gross income allowed, other than federal deductions for personal exemptions, as provided in the laws of the United States for the taxable year, as such deductions existed immediately prior to the enactment of Public Law 115-97[TCJA] with the modifications specified in this section, except as provided for under subsections (f) and (g) of this section." (emphasis added)).
5 Budget Bill, Part WWW, Section 2 (amending N.Y. Tax Law Section 607(a)).
6 Compare Budget Bill, Part WWW, Section 3 (amending subdivision (a) of N.Y.C. Admin. Code Section 11-1707) with Budget Bill, Part WWW, Section 2. See also N.Y.C. Admin. Code §11-1715(a) ("The city itemized deduction of a city resident individual means the total amount of his or her deductions from federal adjusted gross income allowed, other than federal deductions for personal exemptions, as provided in the laws of the United States for the taxable year, as such deductions existed immediately prior to the enactment of Public Law 115-97 [TCJA] with the modifications specified in this section … " (emphasis added)).