Recent additions to the New York State Department of Taxation & Finance website regarding continuing developments under New York State Corporate Tax Reform – including revisions to the 2015 Article 9-A returns themselves – are a reminder of the usefulness of periodically monitoring the Department’s website. In August 2016, the Department made several important additions to its website regarding corporate tax reform, including to its Frequently Asked Questions (“FAQs”), the device used most by the Department to provide updates:
• Alien corporations that generate business losses in New York State may be combinable. Under a newly-released FAQ, an alien corporation (that is, a corporation formed under the laws of a country other than the United States) that conducts a trade or business in New York State resulting in a loss that is effectively connected with a U.S. trade or business may be included in a combined Article 9-A return if it meets the requirements for combined returns, generally based on whether the alien corporation and an in-State affiliate meet the stock ownership and unitary business requirements.
This makes clear that both the nexus and combined return protections available to alien corporations are inapplicable where the alien corporation has effectively connected income or losses.
• No underestimated tax penalties will be imposed for 2015 Article 9-A returns. In another new FAQ, the Department has announced that it will not impose underestimated tax penalties for the tax periods beginning on or after January 1, 2015 and before January 1, 2016; in other words, for the first returns filed under the corporate tax reform regime. Any underestimated tax penalties already paid for such year will be treated as tax overpayments, and the Department will notify corporations of how it is applying the overpayments and how corporations may request any resulting refund. Other penalties, including for the substantial understatement of tax, may still be imposed.
• Proper treatment of net operating losses incurred prior to 2015. A new FAQ makes clear that unused NOLs incurred for tax years beginning prior to January 1, 2015, must be converted into a prior net operating loss conversion subtraction on Form CT-3.3, Prior Net Operating Loss Conversion (PNOLC) Subtraction, and must be reported on Part 3, line 16 of Form CT-3 or CT- 3-A. Corporations that have incorrectly reported the pre-2015 NOL conversion amounts on Part 3, line 18, NOL deduction, must file amended returns and include Form CT-3.3 to avoid a denial of the deduction and the possible issuance of a notice of deficiency.
• Updates to 2015 Corporate Tax Returns for holders of qualified financial instruments. Principally affecting corporations that hold financial instruments marked to market under IRC §§ 475 or 1256, the forms have been corrected in the following respects: (i) loans secured by real property, even if marked to market, cannot qualify as Qualified Financial Instruments (“QFIs”) (and thus are ineligible for the fixed 8% fixed percentage sourcing election); and (ii) where a corporation has more than one type of financial instrument being reported in the catch-all category of “other” financial instruments, only those types of instruments that are actually marked to market will qualify as QFIs.
These corrections do not appear in the published Article 9-A tax forms or instructions. If a corporate taxpayer has already filed its 2015 return inconsistent with these changes, the Department requires that the corporation file an amended return consistent with these changes. The Department also reminds partnerships with corporate partners to check for website updates that may impact corporate tax forms to be used by the partners, which most likely would relate to issues of economic nexus and sourcing for corporate partners.