March 24, 2021
New York State Governor, Senate and Assembly FY2021-22 revenue bills compared
The New York Assembly (A. 3009-B) (Assembly Bill) and Senate (S. 2509-B) (Senate Bill) have released their respective amended versions of New York State (NYS) Governor Andrew Cuomo's proposed Fiscal Year 2021-22 Executive Budget Bill (A.3009-A / S.2509-A) (Governor's Bill and collectively with the Assembly Bill and the Senate Bill, the Bills).1 Each proposal would make several changes to the New York tax code, including: (1) increasing tax rates for high-income individuals and business taxpayers; (2) enacting a new elective passthrough entity tax regime to enable owners of New York pass-through entities (e.g., partnerships and S corporations) to take additional federal tax deductions above the federal state and local tax (SALT) deduction cap; (3) expanding the mortgage recording tax to apply to mezzanine debt financing and preferred equity investments; and (4) establishing a new "pied-à-terre" property tax surcharge on owners of certain non-primary residential properties located within the City of New York.
With the beginning of the state's new fiscal year on April 1 approaching, budget discussions among the Governor's office and the Assembly and Senate leaders will intensify over the next few weeks.
Tax law changes in common with the Governor's proposal
Proposed personal income tax (PIT) law changes (Parts A and B)
Part A — Increased PIT surcharges on, and rates for, high income individuals: The Governor's Bill would impose a temporary income tax surcharge under new, New York Tax Law Section 602 on residents' and nonresidents' New York taxable income over $5 million by inserting new rate brackets ranging from 0.5% to 2%. The temporary surcharge would be imposed for tax years 2021 through 2023.
Both the Assembly and Senate bills amend Part A of the Governor's Bill to extend the top state PIT rate to 11.85% starting with tax year 2021 and extending beyond tax year 2024. The Assembly Bill would increase rates and brackets (permanently) starting at 9.85% (from 8.82%) for income over $2.155 million, increasing the rate to 11.85% for income over $25 million (all for married individuals filing jointly). The Senate Bill would impose tax rates similar to those set forth in the Assembly Bill but the top tax rate of 11.85% (from 8.82%) would apply to income over $50 million. (The bracket thresholds in the Bills differentiate between individual taxpayers' filing statuses (e.g., different revenue thresholds apply for single individuals and married individuals filing separately).)
Part B — Delay middle class tax cut by one year: The Governor's Bill would delay the phase-in of the middle-class PIT rate cuts approved in 2019 2 for one year by applying the tax year 2020 tax rate schedules to tax year 2021. The tax rate schedules for tax years 2022 through 2024 would also be delayed by one year.
Both the Assembly Bill and the Senate Bill intentionally omit Part B of the Governor's Bill and, thus, do not delay the phase-in of the middle-class PIT rate cuts.
Electable pass-through entity (PTE) level tax (Part C)
The Governor's Bill would create new Article 24-A, which would enact an elective PTE level tax at a rate of 6.85% for tax years beginning on or after January 1, 2022.3 The new PTE level tax would permit individual partners, members and shareholders (collectively, partners) of electing PTEs (such as partnerships, limited liability companies treated as partnerships and S corporations) to indirectly deduct New York SALT paid so as to mitigate the impact of the $10,000 SALT deduction limitation imposed under IRC Section 164(b)(6). Partners subject to New York PIT would be entitled to an offsetting tax credit of 92% of the partner's proportionate or pro rata share of taxes paid by an electing PTE against their PIT liability. The Governor's bill would also provide that New York resident taxpayers that pay similar PTE taxes to other states would be entitled to include the distributive share of those taxes when calculating the New York PIT credit for taxes paid to other states, subject to limitations.
Similar to the Governor's Bill, both the Assembly Bill and the Senate Bill would create a new Article 24-A and impose an elective PTE tax with certain amendments to: (1) the definitions of eligible entities, (2) the tax rates,4 (3) the operation of both the PIT tax credit for PTE tax paid and the resident credit for taxes paid to other states, and (4) the mechanics of the annual election by the PTE to apply the PTE tax. In addition, under both the Assembly Bill and the Senate Bill, new Article 24-A would be effective one year earlier than the Governor's Bill (i.e., PTEs could elect into the PTE tax regime under the Assembly Bill and the Senate Bill for tax years beginning on or after January 1, 2021).
Reform and simplify various business tax provisions (Part E)
The Governor's Bill would amend New York Tax Law Articles 9-A, 13 and 22 by treating all federal subchapter S corporations as NYS S corporations effective January 1, 2022, thereby eliminating the ability to separately elect "S" or "C" corporation status for NYS purposes, in addition to other changes.
The Assembly Bill includes Part E in the same manner as the Governor's Bill, but the Senate Bill intentionally omits Part E of the Governor's Bill.
Extend certain sales tax exemptions related to Dodd-Frank Protection Act (Part M)
The Governor's Bill would extend for three years the current exemption from sales and use tax on certain sales or services transacted between certain financial institutions and their subsidiaries.
Both the Assembly Bill and the Senate Bill include Part M in its entirety.
Tax appeals (Part T)
The Governor's Bill would allow the New York Department of Taxation and Finance the right to appeal New York State Tax Appeals Tribunal decisions.
Both the Assembly Bill and the Senate Bill intentionally omit Part T of the Governor's Bill.
Assembly and Senate proposed tax provisions not included in the Governor's Bill
Both the Assembly Bill and the Senate Bill include proposed tax provisions not in the Governor's Bill. The following is a summary of the significant proposals.
Capital gains tax (Part NN of the Assembly Bill and Part PP of the Senate Bill)
The Assembly Bill would impose an additional 1% tax on "capital gains" or "the amount of an individual's New York taxable income attributable to adjusted net capital gain, as defined in [IRC Section 1(h)(3)]." This additional tax would apply to both residents and nonresidents but would not apply to those with New York taxable income of less than $1 million. This provision, if enacted, would take effect immediately and apply to tax years beginning on or after January 1, 2021.5
The Senate Bill would impose the additional 1% tax on New York residents' capital gains only and would apply to an individual's net short-term and net long-term capital gains as defined under IRC Sections 1222(5) and 1222(7). In addition, the exclusions in the Senate Bill differ from those in the Assembly Bill depending upon an individual's tax return filing status. For example, in the case of a resident married individual filing a joint return, the additional 1% tax on capital gains would not apply if the individual's New York State taxable income is not more than $2.155 million, while for an individual resident filing as a head of household, the same tax would not apply if that individual's New York State taxable income is not more than $1.116 million.
Waiving employee location for business tax credits (Part SS of the Assembly Bill and Part NN of the Senate Bill)
Both the Assembly Bill and the Senate Bill would authorize the Commissioner of Taxation and Finance to waive the employment location requirements for any business receiving a tax credit or other benefits under the New York tax law if the recipient can demonstrate that the employment location requirement of such credit would have otherwise been met if not for the restrictions related to the COVID-19 state of emergency declared by the Governor of New York. In the Assembly Bill, this provision would take effect immediately and be deemed to have been in full force and effect on or after March 7, 2020 through the tax year ending 2021, while in the Senate Bill, the provision would have the same initial effective date but expire and be deemed repealed on December 31, 2022.
Temporary business tax surcharge (Part OO of the Assembly Bill)
The Assembly Bill would impose a "temporary" additional "[b]usiness tax surcharge on franchise corporations" subject to tax under Article 9-A. The surcharge would be imposed at a rate of 18% of the taxpayer's tax under N.Y. Tax Law Section 209 (i.e., general corporate franchise tax) and would only apply if the taxpayer's entire net income exceeds $1 million. This surcharge would be in addition to the surcharge imposed under N.Y. Tax Law Section 209-B (i.e., the Metropolitan Transportation Business Tax (MTA) surcharge). A similar surcharge is proposed for insurance and utility companies taxed under Articles 33 and 9, respectively. These provisions would take effect immediately and apply to tax years on or after January 1, 2021 and expire (or be deemed repealed) on December 31, 2025.
Business income base tax rate increase and business capital base tax extension (Part OO of the Senate Bill and Part TT of the Assembly Bill)
Unlike the temporary surcharge proposed in the Assembly Bill, the Senate Bill would permanently increase the business income base tax rate for Article 9-A taxpayers from 6.5% to 9.5% for tax years beginning on or after January 1, 2021. This increase would apply to taxpayers with a business income base over $5 million.6 The Senate Bill would also reinstate the business capital base tax for all Article 9-A corporations, other than qualified New York manufacturers, at a business capital tax rate of 0.125%, effective for tax years beginning on or after January 1, 2021.7 Part TT of the Assembly Bill would also reinstate the business capital base tax at 0.15% solely on qualified New York manufacturers.8
Small business tax rates (Part PP of the Assembly Bill)
The Assembly Bill would impose a 4% business income base tax on small businesses for tax years beginning on or after January 1, 2021.
Limited liability company (LLC) and partnership filing fees (Part TT of the Senate Bill)
The Senate Bill would amend the required filing fees for LLCs and partnerships with New York source gross income of more than $1 million, effective for tax years beginning on or after January 1, 2021. For those LLCs and partnerships, the Commissioner of Taxation and Finance will adjust the filing fee schedule "to generate [$113 million] in additional revenue as compared to the total revenue generated from such fees in the taxable year ." For LLCs and partnerships with New York State source gross income under $1 million, the fee schedule will remain the same as it was on or after January 1, 2008. This provision would take effect on the 90th day after it becomes law.
Corporate tax decoupling from federal opportunity zone benefits (Part QQ of the Senate Bill)
The Senate Bill would amend N.Y. Tax Law Section 208.6(a) and N.Y.C. Admin. Code Section 11-652.5(a) to exclude from the State and City corporate tax definition of exempt "investment income" capital gains that have been federally deferred or excluded under IRC Section 1400Z-2 (i.e., deferred capital gains invested in opportunity zones or excluded capital gains on disposition of such opportunity zone investments). This provision would take effect immediately and apply to tax years beginning on or after January 1, 2021.
Mezzanine debt and Preferred Equity Investments (Part VV of the Assembly Bill and Part SS of the Senate Bill)
Both the Assembly Bill and the Senate Bill propose similar amendments9 to the N.Y. Real Property Law, the N.Y. Uniform Commercial Code and the N.Y. Tax Law to impose: (i) a recording requirement of the financing statement with respect to any mezzanine debt or preferred equity investment related to New York real property for which a mortgage instrument is recorded; and (ii) mortgage recording taxes on such recorded mezzanine loans and preferred equity investments. Under the Assembly Bill, such changes would generally take effect immediately and would apply to all moneys collected on or after April 1, 2021, with some exceptions. Under the Senate Bill, such changes would take effect on the 90th day after the law is enacted.
Pied-à-terre tax (Part WW of the Assembly Bill)
The Assembly Bill would add a new Article 30-C titled "Supplemental surcharge on owners of certain non-primary residential properties" to the New York Tax Law (i.e., a "pied-à-terre tax"). This surcharge would only apply to certain non-primary residence properties in a city with a population of 1 million or more (i.e., currently, only New York City). Generally, the pied-à-terre tax would apply to residential real property, with rates dependent on the type of property. A supplemental surcharge of at least 0.5% and no more than 4% would be imposed on the excess market value of the real property that exceeds $5 million for one-, two- or three-family residences with a five-year average market value of $5 million or more located in New York City. A supplemental surcharge of at least 10% and no more than 13.5% would be imposed on the excess assessed value above $300,000, for residential real property held in condominium or cooperative forms of ownership with an assessed value of at least $300,000. This provision would take effect immediately.
Tax proposals not part of the budget
In addition to the provisions discussed above, separate tax legislation has been introduced in both the Assembly and the Senate apart from the budget bill process, including:
Taxpayers should seriously consider the implications of the provisions of the Assembly Bill and the Senate Bill given the current and well-documented economic and government revenue challenges facing New York State and New York City due to the COVID-19 pandemic. Accordingly, tax increase provisions proposed by the legislature may be more likely to be enacted than in prior years. Taxpayers should consider modeling the impact, if any, that any of these proposals may have on their operations before the final adoption of the Budget Legislation, which is constitutionally mandated to be approved before April 1, 2021. Passage of the budget, however, may be delayed past the April 1 deadline.
1 On January 20, 2021, Governor Cuomo released his proposed Fiscal Year 2021-22 Executive Budget Bill (A.3009-A / S.2509-A) and released his 30-day amendments to the Budget Bill in February 16, 2021 (collectively, Governor's Bill). The focus of the Governor's Bill was the generation of additional revenue for the state after the devastating impact of the COVID-19 pandemic on the economies and government revenues of both New York State and New York City. Governor Cuomo proposed two variations of his budget bill contingent on the amount of federal funding New York State would receive under subsequent COVID-19 relief bills enacted by the US federal government. In addition to the various proposed COVID-19 relief efforts, the Governor's Bill includes significant tax provisions.
2 N.Y. Laws 2019, ch. 59, Part P, Section 1.
3 See A.3009-A/S. 2509-A, Part C, Section 8.
4 Under the Assembly Bill, the tax rate would be 6.85% "if the sum of an entity's partners, members or shareholders share of distributive proceeds attributed to the [PTE] is less than [$5 million]." The tax rate for a PTE with aggregate distributive share amounts that exceed that threshold as currently stated in the Assembly Bill would be "eighty and eighty-two hundredths percent" (i.e., 80.82%) (emphasis added) (See A. 3009-B, Part C, Sec. adding N.Y. Tax Law Sec. 862(a)). This most certainly was a drafting error because the current, maximum PIT rate is 8.82% and the intention in both the Governor's Bill and the Senate Bill appeared to be to reflect the current New York State PIT rates. Both PTE tax rates set forth in A.3009-B would apply for tax years beginning on or after January 1, 2021. See A.3009-B, Part C, Section 8.
5 This proposal is similar to that set out in separate bills A.3352/S.2522 introduced in the Assembly and Senate, respectively, which would impose an additional tax on "low-taxed investment income."
6 This provision is similar to the provisions set out in S.2833 separately introduced in the Senate on January 25, 2021.
7 Under N.Y. Tax Law Section 210, the business capital base tax was set to phase out for years beginning on or after January 1, 2021.
8 This increase only applying to qualified New York State manufacturers and not other Article 9-A taxpayers is more than likely a drafting error.
9 Although the proposals are similar, there are important distinctions. For example, the Senate Bill requires recordation of mezzanine debt and preferred equity interests related to real property located within a city having a population of one million or more (i.e., New York City) on which a mortgage is recorded, while the Assembly Bill requires recordation of all mezzanine debt and preferred equity interests related to New York real property on which a mortgage is recorded. Compare S 2509-B, Part SS, Section 1 with A. 3009-B, Part VV, Section 1. The Senate Bill imposes state- and local-level mortgage recording taxes on the recordation of mezzanine financing and preferred equity interests without requiring additional action by New York City for these taxes to apply. See S.2509-B, Part SS, Sections 3, 5. The Assembly Bill imposes state-level mortgage recording taxes (i.e., the basic tax, the special additional tax, and the additional tax) on the recordation of mezzanine financing and preferred equity interests, while authorizing counties or municipalities to separately impose local-level mortgage recording tax. See A.3009-B, Part VV, Sec. 5.