While much attention understandably has been paid to the U.S. federal tax changes recently proposed by President Biden, clients that pay taxes in New York should also note several New York tax law changes included in the recently-approved New York State 2021-2022 Budget. The Budget includes tax increases for the "ultra-wealthy" and corporations; extends a number of tax credits; and adds two new credits for restaurants and musical and theatrical production companies devastated by the COVID-19 pandemic.
Personal Income Tax Increases: The Budget increases New York State’s current maximum tax rate on individuals from 8.82% to 9.65% for the 2021-2027 calendar years. This rate applies to taxable incomes in excess of $1,077,550 for single filers, $1,616,450 for heads of household or $2,155,350 for joint filers. Two new upper limit tax rates, which apply regardless of filing status, also have been added: 10.3% on income in excess of $5 million and 10.9% on income in excess of $25 million. These increases leave New York State with one of the highest marginal state tax rates in the country and expose New York City residents to income tax at a rate as high as 14.776% -- the highest combined state and local tax rate in the country. For middle class taxpayers, however, the Budget retains the previously-approved phase-in of middle-class tax cuts in 2021 to 5.97% for married taxpayers filing jointly in the $43,000-$161,550 income bracket and 6.33% for married taxpayers filing jointly in the $161,550-$323,200 income bracket.
Corporate Income Tax Increases: For tax years beginning on or after January 1, 2021 and continuing through 2023, the current corporate income tax rate of 6.5% remains in effect for the first $5 million of taxable income, but increases to 7.25% with respect to income in excess of that amount. Before 2021, New York imposed a “capital base” tax on the business capital of corporations doing business in the state if the application of the “capital base” tax yielded a higher tax than the income tax or a statutory minimum tax. In 2020, the “capital base” tax rate was 0.025%. The “capital base” tax was scheduled to be eliminated in 2021, but the Budget restores and increases the “capital base” tax rate to 0.1875% for 2021-2023. Housing co-ops, manufacturers and small businesses are exempt from the “capital base” tax.
New Elective Pass-Through Entity Tax: In an effort to help New York individual taxpayers work around the $10,000 federal limitation on the deduction of state and local taxes, the Budget creates a new and elective pass-through entity tax available to eligible partnerships and S corporations beginning in 2021. Because the tax is imposed directly on the pass-through business entity and not its individual owners, the tax is deductible “above the line” for federal income tax purposes and not as an itemized deduction subject to the $10,000 federal limit, and the individual owners receive a credit against their New York State personal income tax liability for some or all of their share of the tax paid by the entity. The pass-through entity election to pay this tax must be made annually by the due date of the first estimated payment. Once made, the election is irrevocable. A number of other states, including New Jersey and Connecticut and New Jersey, have enacted similar laws specifically targeted at the federal deduction limitation.
Tax Credits:The Budget changes the rules regarding various tax credits, including the following:
- extends the availability of Empire State film production and post-production tax credits to 2026 and adds additional counties as eligible sites;
- extends the availability of the existing musical and theatrical production tax credit through 2025 and adds a new $100 million tax credit program under which eligible New York City musical and theatrical production companies can claim a credit for tax years beginning on or after January 1, 2021 through December 31, 2023 equal to 25% of qualifying production expenditures, subject to a maximum credit of $3 million per qualifying New York City musical and theatrical production for first performances during the first year applications are accepted and $1.5 million for first performances in the second year applications are accepted; and
- adds a new $35 million "restaurant return-to-work tax credit program" under which eligible businesses can claim a $5,000 credit (limited to $50,000 in total tax credits) for each net full-time equivalent employee increase.