06 February 2025 New York FY2025-26 proposed executive budget includes business and individual tax changes
Governor Kathy Hochul on January 21, 2025, kicked off the first step in New York State's budget process by putting forth her New York State (NYS) fiscal year 2025–2026 Revenue Legislation, filed as S. 3009 and A. 3009 (hereinafter, "Governor's Bill"). The provisions discussed herein are proposed and subject of continuing negotiations between the Governor's office, the NYS Senate and the NYS Assembly. The budget process will continue with 30-day amendments to the Governor's Bill from the Governor, "one house" bills from the Assembly and Senate with new and amended provisions, and then the final negotiated budget legislation, which is intended to be enacted on or around March 31, 2025 (which is NYS's fiscal year-end). This Tax Alert summarizes the relevant provisions in the Governor's Bill followed by a summary of select tax bills introduced outside of the budget process that are of interest to business taxpayers. The Governor's Bill would increase the estimated tax threshold for corporate taxpayers. Currently, Article 9-A taxpayers are required to make estimated tax payments if they believe that their corporate franchise tax liability for the current tax year exceeds $1,000.1 Beginning with tax year 2026, the $1,000 threshold would be increased to $5,000. This provision would take effect immediately and the increased threshold would apply to tax years beginning on or after January 1, 2026.
These provisions, except conditioning eligibility on the payment of estimated tax, were introduced last year outside the budget process in A. 8451-A and S. 8115-A but were never enacted. These amendments would be effective for tax years beginning on or after January 1, 2026. Establish the Companies Attracting Talent to Advance Leading Innovations and Scale Technologies (CATALIST) NY program (Part G) The Governor's Bill would establish the "CATALIST NY Program" to help cultivate NYS's innovation economy and support innovation businesses during the early stage of their growth. Entities designated3 as a CATALIST NY small business would be eligible for an allocation of personal income tax (PIT) benefits for up to eight newly hired full-time employees. Under the program, wages for qualifying employees would be exempt from NYS PIT. This benefit would be available for five years, beginning with the tax year in which the Department of Economic Development issues a certificate of tax benefits to the CATALIST NY small business. No tax benefit would be allowed for tax years beginning on or after January 1, 2035. These provisions would take effect immediately and apply to tax years beginning on or after January 1, 2025. The Governor's Bill would extend the Excelsior Jobs program, which is currently set to sunset at the end of 2029, through 2039. The Governor's Bill also would expand the program to the semiconductor industry, with enhanced benefits for semiconductor supply chain businesses and create two new programs — the semiconductor research and development (R&D) project program and the semiconductor manufacturing workforce training incentive program. For semiconductor supply chain projects, the amount of each component of the Excelsior Jobs program would be as follows:
The credit amount available under the semiconductor R&D project program would equal 15% of the cost or other basis for federal income tax purposes of the qualified investment in semiconductor R&D projects in NYS. Taxpayers would be able to claim the credit for up to 10 years. The semiconductor manufacturing workforce training incentive program would provide a credit equal to 75% of wages, salaries or other compensation, training costs and wrap around services, up to a maximum of $25,000 per employee receiving eligible training. The credit would be capped at $1 million for eligible non-semiconductor manufacturing businesses and $5 million for eligible semiconductor manufacturing businesses. The aggregate amount of total credit allowed per year would be capped at $20 million. The Governor's Bill would repeal the employee training incentive program effective December 31, 2028. Under current law, the recipient of a state historic tax credit must be the same taxpayer as the recipient of the equivalent federal tax credit and creditable projects are limited to those located in census tracts at or below the state median family income, unless the projects are in a state park, state historic site, or other state-owned land (collectively "state land") that is under the jurisdiction of the Office of Parks, Recreation, and Historic Preservation (NYS Parks). The Governor's Bill would allow the transfer of state historic tax credits upon approval by the commissioner of the NYS Parks. The Governor's Bill would further expand the eligibility of projects to include certain qualified affordable housing rehabilitation projects where the taxpayer has entered into an agreement of at least 30 years with the state, federal, or other authorized affordable housing agency, even where those projects are on land outside of the NYS Parks's jurisdiction. These changes would apply to tax years beginning on and after January 1, 2026. Amend the NYC Relocation and Employment Assistance Program (REAP) and create a new relocation credit program (Part X) The Governor's bill would extend the existing REAP for five years, through July 1, 2030, and create a new NYC incentive — the Relocation Assistance Credit Per Employee Program (RACE) — to entice out-of-state businesses to relocate to NYC. The RACE program would provide an annual refundable credit against NYC taxes of up to $5,000 per eligible employee for up to 11 years. The credit would not apply to the relocation of retail activity or hotel services. Overall eligibility criteria would include moving operations into NYC and signing a lease of 20,000 square feet or more in a building constructed before 2000. A business would be ineligible for the credit if it had employees assigned to premises in NYS during the period beginning January 1, 2025, and ending on the date the business enters a lease/contract to purchase eligible premises. The business would also be required to have been conducting substantial operations outside NYS for 24 consecutive months before the move. These provisions would take effect July 1, 2025. Part U of the Governor's Bill would increase the credit for hiring persons with disabilities to the first $5,000 in qualified first-year wages from 35% of the first $6,000 in qualified first year wages beginning in 2025. If the federal work opportunity tax credit applies, the $5,000 amount would apply to qualified second-year wages. Parts BB and CC of the Governor's Bill would extend the workers with disabilities tax credit and the hire a vet tax credit through 2028 (from 2025), respectively. The Governor's Bill would gradually increase the aggregate dollar amount of the low-income housing credit that may be allocated to eligible low-income buildings from $172 million to $187 million in 2025, with annual increases until reaching $307 million in 2029.4 The Governor's Bill includes two provisions aimed at increasing availability of one- and two-family homes in NYS. Subpart A would add Article 16 to the NY Real Property Law and impose a mandatory 75-day waiting period before "covered entities" can "purchase, acquire, or offer to purchase or acquire one- or two-family residences." A "covered entity" would be defined as an institutional real estate investor or an entity that receives funding from an institutional real estate investor to purchase one- or two-family residences. An institutional real estate investor would be defined as an investor that directly or indirectly owns at least 10% of 10 or more one-or two-family residences and has $50 million or more in net value or assets under management. Land banks, IRC Section 501(c)(3) tax-exempt entities, and community land trusts would be excluded from the definition of "covered entities." Failure to abide by the waiting period would result in liability for civil damages and penalties, up to $250,000. Additionally, prior to close, a covered entity would have to disclose its status as a covered entity to the seller. Failure to provide this disclosure would result in liability for civil damages. The Attorney General would be tasked with enforcement, including through injunctive and declaratory relief and by imposing civil damages and penalties. These requirements would take effect 120 days after enactment. Subpart B would amend Article 9-A, Article 22, and Article 33 of the Tax Law to disallow depreciation and interest deductions for institutional real estate investors (and their partners) on "covered properties." Specifically, institutional real estate investors (same as defined in subpart A) would be required to "add back" to their federal starting point any interest expense deductions and any depreciation deductions permitted under the IRC with respect to "residential properties consisting of not more than two dwelling units located in [NYS]." An interest expense deduction, however, would be permitted for interest paid or accrued in the tax year in which a covered property is sold to an individual for use as a principal residence or to a nonprofit organization, the principal purpose of which is creation, development, or preservation of affordable housing. These modifications would not provide exceptions for homes that meet the definition of "covered properties" directly or indirectly owned by institutional real estate investors. Subpart B would take effect for tax years beginning on or after January 1, 2025. The Governor's Bill would add new reporting requirements for federal partnership audit results5 intended to align NYS partnership reporting with the federal regime enacted under the Bipartisan Budget Act (BBA) of 2015. The proposed framework in the Governor's Bill for reporting federal partnership audit adjustments borrows from model Multistate Tax Commission language but would require reporting and payment by the partnership, without the option to push-out a tax liability to the partners. Partners would report the partnership adjustment only for the purpose of claiming a refund. Covered partnerships — NYS income or partners: The proposed framework would apply to partnerships that have resident NYS partners or income derived from NYS sources (including any gross income, gain, loss, deduction, penalty, credit or tax for any year of such partnership and amounts of any partner's distributive share of other partnership income). It is not clear whether income from NYS sources is determined under the standards for the NYS PIT or corporate franchise tax, or both. Covered changes — BBA change or correction to income: The reporting and tax payment requirement would apply when the IRS (or an officer of the US government) makes a change or correction to any item of income required to be reported on a partnership return (including a partner's distributive share of income) and the partnership receives an adjustment under IRC Section 6225, makes a federal election for alternative payment under IRC Section 6226, or makes an administrative adjustment request under IRC Section 6227. Required reporting — partnership reporting: The proposed framework would require partnerships to report any changes within 90 days of the final federal determination date "in sufficient detail to allow for the computation of the NYS tax change or correction for the reviewed year." The partnership also would be required to report identifying information for its direct and indirect partners, and the computation of tax, as more fully described immediately below. The partnership would be required to report all BBA changes even when no tax is due. The proposed legislation would give the Department authority to determine how impacted partnerships must report BBA changes, as well as the specific details and information that partnerships would be required to report. Accordingly, the form and format for the reporting is not yet clear. Required payment — partnership payment: While the language is not entirely clear, it appears that any tax due would be computed on the additional cumulative distributive share of gross income or gain that would be taxable by New York for all direct and indirect corporate, resident, and nonresident individuals and trusts owners. That amount would be multiplied by the highest NYS PIT rate, which is currently 10.9%, and, for NYC resident individuals and trusts, by the highest NYC PIT rate, which is currently 3.876%. The tax payment does not encompass NYC business taxes, such as the Business Corporations Tax, General Corporation Tax, and Unincorporated Business Tax. The tax, penalty and interest would be calculated with respect to the reviewed year of the partnership, as defined by IRC Section 6225(d). For purposes of computing the tax due on the distributive shares of each partner, and specifically the amount of income allocable and apportionable to NYS and NYC, the proposed framework would look through any pass-through entities that are direct partners in the partnership (i.e., "tiered partners") to the ultimate individuals, trusts, and/or corporations that would otherwise be the taxpayers. Distributive shares allocable to general business corporations that pay tax under Article 9-A and insurance corporations that pay tax under Article 33 would be apportioned using the Article 9-A rules. Distributive shares allocable to individuals and trusts would be allocated and apportioned using the Article 22 rules. Where insufficient information is available to determine the "distributive share" of a corporate partner, the partnership would have to assume that 100% of the partner's distributive share is apportionable to NYS. In the same circumstance for an individual or trust partner, the partnership would have to assume the partner is a NYC resident and compute tax accordingly. The meaning of distributive share, as used for this purpose, is not entirely clear but appears to be broader than its meaning under Subchapter K of the Internal Revenue Code and is probably intended to capture the amount of income that would be taxable by New York State (and, for individuals and trusts, by New York City). Partnership representative — the same as federal unless elected otherwise: The partnership representative that would have the responsibility — and sole authority — to act on behalf of the partnership would be the same as the federal partnership representative, unless the partnership selects a different representative for NYS. Refunds — partner request: Partners, not the partnership, would be able to request refunds arising from a BBA change. To report this change, the partners would have to individually file amended returns. However, the proposed framework does not include a mechanism for partners, direct or indirect, to request a refund for the difference between the tax the partnership pays and the tax that would be due from the partners using their applicable tax bases and rates. The proposals would take effect immediately and apply to any final partnership adjustment issued by the Internal Revenue Service since January 1, 2018, provided any final adjustments issued before the effective date would need to be reported within one year of the effective date, and no interest would accrue on the adjustments until one year after the effective date. The Governor's Bill would clarify that electronic access of the Department of Taxation and Finance's (Department) online services system by a taxpayer does not, in and of itself, create separate protest rights before the Division of Tax Appeals, unless the accessed information is a notice of determination for which a hearing is specifically authorized for such an electronically delivered notice in lieu of physical mailing.6 The proposed language is intended to avoid the result reached by the NYS Supreme Court, Appellate Division, Third Department in Dumpling Cove, LLC v. Commissioner of Taxation and Finance, 230 A.D.3d 927 (3rd Dept. 2024), in which a majority of the court held that by directing a taxpayer to view their account balance on the Department's website, the Department effectively treated the online account as a notice, thereby conferring the taxpayer's right to a hearing. If enacted, these changes would take effect immediately. The Governor's Bill would authorize the Department to electronically file "all warrants and warrant-related records" issued by the Department with the NYS Department of State to effectuate liens and judgments against real, personal or other property in NYS that is owned by the person or persons named in the warrant. This would help streamline the process for recording NYS tax warrants and warrant-related records. If enacted, these provisions would take effect July 1, 2025, and apply to warrants and warrant-related records filed, or deemed to have been filed, on or after July 1, 2025. The Governor's Bill would extend through April 1, 2030, the Department's authorization to use the FIDM system for collection of fixed and final tax debts. The expansion of the FIDM system for collection of tax debts by matching bank account data at financial institutions is set to expire on April 1, 2025. This change would take effect upon enactment. Provide a middle-class tax cut and extend the temporary PIT high-income surcharge for five years (Part B) The Governor's Bill would reduce the tax rates for middle-class individuals filing as head of household, married filing jointly, and single status with incomes below certain thresholds.7 The tax rates would be reduced over two years, in 2025 and again in 2026. The Governor's Bill would also extend the temporary PIT high-income surcharge through tax year 2032. These provisions would take effect upon enactment. The Governor's Bill would provide a one-time $300 or $500 "Inflation refund credit" for tax year 2025 for certain individual taxpayers with adjusted gross income under $300,001 (married filing jointly) or under $150,001 (single, married filing separately, head of household).8 The credit amount would be based on a taxpayer's filing status in 2023. The Governor indicated these amounts would be distributed as advanced payments to eligible taxpayers based on how they filed their 2023 NYS PIT returns. This provision would take effect upon enactment. In addition to the tax changes proposed in the Governor's bill, the legislature is considering several tax measures that have been introduced in the Assembly and the Senate. The following is a summary of select measures that are of interest to business taxpayers. These proposed bills, which are similar to legislation proposed in prior years (such as S.1980 (2023)), would amend various corporate franchise and PIT provisions. Proposed changes include:
These bills would repeal the existing stock transfer tax rebate. Similar bills have been considered in prior sessions. S.1487 (introduced January 10, 2025) This would, starting in tax years beginning on or after January 1, 2027, increase the small corporation income threshold and reduce the small corporation income tax rate and expand the small business exemption to passthrough entities. These bills would impose a 0.5% excise tax on all corporate stock buybacks of issued shares. Similar bills have been considered in prior sessions. In the coming months, the proposed budget revenue bills are expected to undergo many changes. As it is early in the budget process, it remains unclear which provisions of the Governor's Bill will be included in a final budget deal.
Document ID: 2025-0418 | ||||||||
