On March 30, 2018, the New York State Legislature approved a compromise 2018–2019 Budget Bill. Among the more significant tax provisions adopted (in bill S. 7509-C/A. 9509-C) were the following:
- Optional Employer Payroll Tax. Adopts the Governor’s workaround of the $10,000 federal limitation for state and local tax deductions by creating a new “Employer Compensation Expense Program”: an annual election, to be made by December 1 of each calendar year for the succeeding year, giving employers in New York the option to become subject to a new payroll tax for tax years beginning after 2018. The tax would be imposed on the employer’s annual payroll expenses in excess of $40,000 per covered employee, at the rate of 1.5% in 2019, and rising to 5% when fully phased-in starting in 2021. The payroll tax is expected to be deductible by the employer for federal income tax purposes. Covered employees would be allowed a credit against their New York State personal income tax for equivalent amounts. Although not explicitly provided in the legislation, it is expected that electing employers may seek to recoup the payroll tax by reducing covered employee compensation by commensurate amounts. Part MM.
- State-Operated Charitable Funds. Adopts the Governor’s proposal to establish two State-operated charitable funds, relating to health care and education, to which individuals can make donations and be entitled to claim a State tax credit of 85% of the donation amount contributed in the immediately preceding year, for tax years beginning after 2018. The Governor issued a press release stating that these donations may be claimed as federal and State itemized deductions by individuals who itemize. The legislation, however, does not address the deductibility of such contributions for federal income tax purposes, and such deductibility may be questioned by the IRS since taxpayers will receive a State tax credit in exchange for the contribution. Part LL.
- Confirms Exemption for One-Time Repatriated Foreign Income. Makes explicit that the one-time inclusion in a corporation’s federal taxable income of repatriated foreign income under I.R.C. § 951, received from a corporation not included in the taxpayer’s Article 9-A combined return, qualifies as “exempt CFC income” and therefore is not subject to New York State corporate tax. However, taxpayers must add back for Article 9-A purposes the partial federal deduction allowed for repatriated foreign income. Left in place is the provision authorizing the Tax Department to directly or indirectly attribute the taxpayer’s interest deductions to such exempt income, and the election allowing the taxpayer to reduce its total exempt income by 40% in lieu of such expense attribution. Conforming legislation was passed with respect to the New York City corporate tax. Part KK. (Note that a New York State Senate proposal to similarly exempt federal Global Intangible Low-Taxed Income (“GILTI income”) under IRC § 951A did not pass.)
- Decouples from Federal PIT Deduction Limitations. For New York State and City personal income tax purposes, residents are entitled to claim itemized deductions as they existed immediately prior to the enactment of federal tax reform (i.e., allowing without limitation deductions for local real property taxes, but not state and local income taxes) beginning in 2018. It also permits itemized deductions to be available for State and City purposes even where the taxpayer claims the federal standard deduction. Part JJ.
- Extends Statute of Limitations for NYS and NYC Tax Departments to Assess Tax on Amended Returns. Proposed as an “anti-abuse” provision, this provision allows the New York State and New York City tax departments to assess additional corporate or personal income tax, including recovery of a previously paid refund, within one year after an amended return is filed. The extended limitation period applies to tax “attributable to a change or correction on the amended return,” a phrase that will likely require clarification by regulation. Part H.
Several of the Governor’s proposals were not passed by the Legislature, including: (i) the imposition of an “Internet Fairness Conformity Tax” that would have required Internet “marketplace providers” that “facilitate” sales of tangible personal property on behalf of sellers to collect New York sales tax on those transactions; (ii) a 14% “Healthcare Insurance Windfall Profit Fee” imposed on net underwriting gains from health insurance sales to New York customers; (iii) a proposal that would have treated carried interests earned by promoters as income from a trade or business (subjecting nonresident individuals to tax on those amounts), and would have imposed a 17% “carried interest fairness fee,” but only if substantially similar legislation was enacted by several nearby states; (iv) the deferral of certain business tax credits aggregating in excess of $2 million annually for the years 2018 through 2020; and (v) affording the New York State Tax Department the right to appeal adverse decisions of the Tax Appeals Tribunal to the New York courts.
The Governor is expected to sign the legislation shortly.