The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions. The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.
This post is the sixth in a series analyzing the New York Budget Bill, and discusses changes to the net operating loss (NOL) and investment tax credit provisions.
Net Operating Losses – Prior NOL Conversion Subtraction
For tax years beginning on or after January 1, 2015, the calculation of the New York NOL deduction has changed dramatically. As a result, the Tax Law provides for a transition calculation, a prior NOL Conversion Subtraction, for purposes of computing the allowable deduction for NOLs incurred under the prior law.
To calculate the Conversion Subtraction, the taxpayer first must determine the amount of NOL carryforwards it would have had available for carryover on the last day of the “base year”—December 31, 2014, for calendar year filers, or the last day of the taxpayer’s last taxable year before it is subject to the new law—using the former (i.e., 2014) Tax Law, including all limitations applicable under the former law. This amount is referred to as the “unabsorbed NOL.” Second, the taxpayer must determine its apportionment percentage (i.e., its BAP) for that base year (base year BAP), again using the former (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer’s tax report for the base year. Third, the taxpayer must multiply the amount of its unabsorbed NOL by its base year BAP, then multiply that amount by the tax rate that would have applied to the taxpayer in the base year (base year tax rate). The resulting amount is divided by 6.5 percent (qualified New York manufacturers use 5.7 percent). The result of these computations is the prior NOL Conversion Subtraction pool.
A taxpayer’s Conversion Subtraction will equal a portion of its Conversion Subtraction pool computed as outlined above. The standard rule provides that one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted as the Conversion Subtraction. The Tax Law as originally drafted also provided that any unused Conversion Subtraction could be carried forward until tax years beginning on or after January 1, 2036 (tax year 2035 for calendar year filers). The technical corrections include slight changes to that carryforward provision. Now, any unused Conversion Subtraction may be carried forward for no longer than 20 years or until the taxable year beginning on or after January 1, 2035, but before January 1, 2036, whichever comes first. This language corrected an error in the original law that allowed for the carryforward beyond a 20-year period.
The Tax Law as originally drafted also provided taxpayers with an alternative one-time election to deduct up to one-half of the Conversion Subtraction pool over a two-year period beginning with the tax year beginning on or after January 1, 2015. However, if a taxpayer makes this election, that taxpayer cannot carry forward any unused Conversion Subtraction beyond that two-year period. The technical corrections clarify that this election is (1) revocable and (2) must be made on a taxpayer’s first return (not an amended return) for the tax year beginning on or after January 1, 2015, and before January 1, 2016 (with regard to extensions). The technical corrections also clearly provide (as previously assumed) that any unused portion of the Conversion Subtraction pool will be forfeited at the end of the two-year period. Since the election is revocable, taxpayers should consider making the election if there is any chance that the taxpayer may be able to use the Conversion Subtraction pool within the first two years.
Net Operating Losses – Current Year
Under current law, a taxpayer can deduct an NOL Deduction from its apportioned business income base. The NOL Deduction for a particular tax year is the amount of NOL from one or more taxable years that is carried forward or back to that tax year. An NOL is the amount of “business loss” incurred in a tax year multiplied by the taxpayer’s apportionment percentage for that year (i.e., NOLs are computed and carried forward on a post-apportionment basis). The maximum amount of NOL Deduction allowed in a taxable year is the amount that reduces the taxpayer’s tax on apportioned business income to the higher of the tax on capital or the fixed dollar minimum tax.
The technical corrections provide new ordering rules for purposes of applying NOL Deductions. Taxpayers are now required to first carry an NOL back to the three taxable years preceding the loss year (with the exception that no loss can be carried back to taxable years beginning before January 1, 2015). The NOL must first be carried back to the earliest of the three taxable years. If the NOL is not entirely used in that year, it must be carried to the second taxable year preceding the loss year, and any then-remaining NOL must be carried to the year immediately preceding the loss year. After application of the carryback rules, any unused NOL may be carried forward (until entirely used) for up to 20 taxable years following the loss year. NOLs carried forward must also be carried in order, first to the taxable year immediately following the loss year, and so on.
Taxpayers can irrevocably elect to waive the entire carryback period. Such an election must be made on an original (not amended) timely filed return (determined with regard to extensions) for the year of the NOL for which the election is to be in effect. A separate election is required for each loss year, and an election made by a combined group will apply to all group members.
Investment Tax Credit
As with 2014 corporate tax reform in New York, earlier budget bill proposals involving credits, including changes to the investment tax credit calculation for masters of films, television shows or commercials, were not adopted.
With respect to the financial services investment tax credit, the technical corrections provide that the investment tax credit may not be taken for property first placed in service on or after October 1, 2015, thus effectively ending the investment tax credit for financial services companies as of that date. For property placed in service before that date, language from prior law was restored that permits the aggregation of use by certain affiliates to meet the statutory qualifying use requirement.
Amendments were also made to provide that certain credits may be applied to reduce tax to the fixed dollar minimum rather than to the greater of the tax on capital or the fixed dollar minimum (e.g., the investment tax credit).