The recently enacted New York State (NYS) budget act is important for both the tax provisions it includes and those that were not included.
New York is the first state to implement legislation to combat the federal amendment that limited the deduction for state and local taxes to $10,000. New York adopted a two-tier attack. First, the budget establishes two state-operated Charitable Contribution Funds to accept donations, which allows the taxpayer a credit against his NYS personal income tax for 85% of the contribution. It appears doubtful, however, that the IRS will allow the taxpayer a federal charitable contribution deduction for a donation to any such fund.
New York also allows an employer to voluntarily pay a payroll tax on its employees who have wages in excess of $40,000 a year. The tax, which phases in over three years, is 1.5% in 2019, 3% in 2020 and 5% thereafter. The employee is entitled to credit an after-tax portion of the payroll tax against his NYS personal income tax. Even assuming this is respected as a deductible employer tax, in order for this to work, the employee must agree to a reduction in his compensation. In addition, the employer or employee has to agree to bear the additional administrative cost. If the payroll tax conversion works, the parties will not only convert a nondeductible NYS personal income tax into a deductible payroll tax, but the parties will also benefit from paying federal income and employment tax on a lower amount of wages. It remains unclear whether the IRS will bless this structure, and, even if it does, whether because of the complexity any employers will elect to pay the tax.
Under the budget act, filing an amended return will give NYS an additional year to assess additional tax. The new law also reverses the Sobotka case, again providing that the 183-day rule for a statutory resident is based on all days during the tax year, not just those for which the taxpayer is not domiciled in NYS. In addition, the new law codifies the Tax Department’s policy that a member of a limited liability company and a limited partner are not personally liable for the limited liability company’s or limited partnership’s NYS sales tax if he can show that he had no duty to act on behalf of the company in complying with its sales tax and that he owns less than 50% of the company.
NYS decouples from the new federal tax changes in certain cases. For example, an individual may claim the federal standard deduction but still itemize for NYS, and can continue to claim certain deductions that are no longer allowed federally. In addition, corporate transition income under IRC Section 965 is not taxable for NYS, but the related deduction is also not allowed.
Various provisions that had been proposed by Governor Cuomo were not adopted. These include the 17% additional tax on carried interests, a required deferral in the use of certain business tax credits in excess of $2 million and a requirement for certain marketplace providers to collect sales tax. Of course, the fate of remote sellers in having to collect sales tax is now before the Supreme Court.