Corporate income and franchise taxes

Taxable income

How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?

Corporate taxpayers in New York State pay tax equal to the highest amount calculated under three alternative tax bases:

  • business income;
  • capital base; or
  • fixed dollar amount.

 

The starting point for the New York State business income is the federal income tax base. Certain additions are required, including:

  • income from non-New York bonds;
  • depreciation adjustments; and
  • royalty payments to related parties.

 

Subtractions include depreciation adjustments and interest income on U.S. bonds.

While a corporate taxpayer may generally deduct certain business interest expense from its New York business income as it would under federal law, New York State has decoupled from the federal increase in the limitation on deductible business interest for the New York State corporate income tax and for New York City business income taxes. (The CARES Act increased the limitation from 30 per cent to 50 per cent of adjusted taxable income for taxable years beginning in 2019 and 2020.)

New York State provides its own net operating loss (NOL) regime for corporate taxpayers, so federal changes to NOL treatment under the Tax Cuts and Jobs Act and the CARES Act do not affect state or city corporate income taxes.

Business income is apportioned to New York State based on the receipts sourced to New York State.

A separate election must be filed with New York State in order for a corporation to be treated as an S corporation. However, if no New York State election is made for a federal S corporation and the corporation’s investment income is more than 50 per cent of its federal gross income for that year, it will automatically be considered an S corporation for New York State purposes. New York State S corporations pay the fixed dollar minimum amount.

New York City has a similar approach to New York State, apportioning the income based on receipts from New York City. Most New York City corporations are subject to the corporate tax of 2015.

Unlike New York State, New York City does not recognize federal S corporation election, and S corporations are subject to the General Corporation Tax, which is different than the tax regime imposed on other corporations (the corporate tax of 2015). 

In addition to corporate tax, New York City imposes unincorporated business tax (U.B.T.) on unincorporated entities (e.g., partnerships, limited liability companies, fiduciaries, associations, estates, trusts, and individuals engaged in trades and professions) doing business in New York City. The starting point for the U.B.T. is the taxpayer’s federal taxable income, subject to certain modifications, including an addback of compensation paid to any owners of the entity. Certain income—including trading for one’s own account, and rental of real property—is exempt.

The 2022 fiscal budget included a “pass-through entity tax,” designed as a workaround for the federal $10,000 limitation on the deductibility of state and local taxes (the SALT cap), which was enacted as part of the federal 2017 legislation known as the Tax Cuts and Jobs Act (TCJA). The pass-through entity tax is an entity-level tax that eligible partnerships and New York S corporations can elect to pay on their taxable income for taxable years of the partnership or S corporation beginning after December 31, 2020. Direct partners and shareholders of electing businesses receive a credit against their New York State personal income tax liability for their share of the entity-level tax paid.  Beginning in 2021, New York residents can claim credit for entity-level taxes paid to other states that are “substantially similar” to the New York pass-through entity tax on account of income both derived from such other state and subject to tax under article 22. As states have enacted their own unique pass-through entity taxes, it is not clear how “substantially similar” may be interpreted. Any excess credit is refundable. In computing their taxable income for New York State personal income tax purposes, the credit is added back to a partner’s or shareholder’s income. Thus, from a New York State personal income tax perspective, the net effect of the pass-through entity tax should be approximately the same as if the election to pay the tax were not made. The major difference, however, is that the pass-through entity tax is designed to be deductible for federal income tax purposes.

The pass-through entity tax is imposed for each taxable year on the taxable income of every electing partnership and S corporation at the following marginal rates: 

Pass-through entity taxable income

Marginal rate

Not over $2 million

6.85%

Over $2 million but not over $5 million

9.65%

Over $5 million but not over $25 million

10.30%

Over $25 million

10.90%

 

Taxable income is defined as (1) for partnerships, all income from New York sources included in the taxable income of a non-resident partner and all income included in the taxable income of a resident partner, and (2) for S corporations, all income (attributable to both resident and non-resident shareholders) from New York sources. Beginning in 2021, New York residents can claim credit for entity-level taxes paid to other states that are “substantially similar” to the New York pass-through entity tax on account of income both derived from such other state and subject to tax under article 22. As states have enacted their own unique pass-through entity taxes, it is not clear how “substantially similar” may be interpreted.

The election is made annually and must be made by the due date of the first estimated payment of the tax, and once made is irrevocable for the calendar year. An electing partnership or S corporation must pay the pass-through entity tax in four equal installments on March 15, June 15, September 15 and December 15 in the calendar year prior to the due date of the required return. Returns for the pass-through entity tax must be filed on or before March 15 following the close of the taxable year.

For calendar year 2021, the election to pay the pass-through entity tax must be made by October 15, 2021, and an electing entity is not required to make estimated payments for taxable year 2021. Partners, members or shareholders of electing entities should make estimated payments for 2021 as required by the personal income tax as though not entitled to the credit for the pass-through entity tax for such year.

How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?

New York State’s apportionment rules generally apportion all business income and capital using a single receipts factor that primarily sources receipts based on customer location (market-based sourcing). Certain industries, such as manufacturing, financial institutions, insurance companies, airlines, and construction companies, have different apportionment rules.

Before 2015 market-based sourcing was limited, and most receipts were sourced based on the place of performance, with exceptions for certain industries.

New York City also uses a single receipts factor—primarily, market-based sourcing. Historically, for New York City the income was apportioned using a three-factor formula for sales, property, and payroll, with differing weight assigned to each in a specific year. The single-factor formula is effective for years beginning on or after January 1, 2018 (with an election for certain small taxpayers and manufacturers to continue using a three-factor formula).

The U.B.T. uses a single receipts factor beginning in 2019.

Nexus

How is nexus determined for corporate income tax purposes?

Businesses that exercise a corporate franchise, do business, employ capital, own or lease property, maintain an office, or derive receipts (of $1 million or more in a tax year) from activity conducted in New York State will be deemed to have nexus for state purposes. A corporate partner in a partnership that is doing business in New York State will also be considered to be doing business in New York State.

A foreign corporation will be deemed to have New York State corporate income tax nexus if it:

  • has issued cards (including bank, credit, travel, and entertainment cards) to at least 1,000 customers with a New York mailing address;
  • has 1,000 or more New York locations covered by merchant contracts to which the corporation has remitted payments for credit card transactions; or
  • has a combined total of 1,000 or more New York customers and merchant locations.

 

Affiliates engaged in a unitary business meeting a common ownership test (generally, 50 per cent or more common ownership) may be required to file combined returns in New York State and New York City.

A corporation that meets no other nexus standards, but is engaged in a unitary business and meets a common ownership test will have nexus if:

  • it has at least $10,000 of receipts sourced to New York;
  • its affiliates have at least $10,000 of receipts sourced to New York; and
  • the members of the unitary group meet the $1 million threshold.

 

Similarly, a corporation that meets no other nexus standards and is engaged in a unitary activity and meets a common ownership test will have nexus if:

  • it has at least 10 customers or locations (or a combination thereof); and
  • the members of the unitary group that have such 10 customers or locations meet the nexus standards.

 

New York City has similar physical nexus standards, but has not adopted an economic nexus standard.

Nexus standards are a fact-intensive inquiry and the standards may be applied differently by New York State and New York City.

Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?

There is generally no statutory affiliate nexus for corporate income tax in New York. However, affiliates engaged in a unitary business meeting a common ownership test (generally, 50 per cent or more common ownership) may be required to file combined returns in New York State and New York City. 

Rates

What are the applicable corporate income tax rates?

Corporate franchise tax is charged at the highest of:

  • the business income base—6.5 (increased to 7.25 for 2021–2023) per cent of income apportioned to New York;
  • the capital base—0.05 per cent of the capital base, not exceeding $5 million; or
  • a fixed dollar amount based on the amount of New York receipts (ranging from $19 to $200,000).

There is also a temporary reinstatement of the capital base tax starting 2021 for non-manufacturing corporations at a rate of 0.1875 per cent. The reinstatement also terminates after the 2023 tax year.

New York State also imposes a metropolitan transportation business tax surcharge, currently at the rate of 29.4 per cent for 2020, on the portion of New York State franchise tax (before the deduction of credits) allocated to the metropolitan commuter transportation district.

New York City imposes general corporation tax at the highest of:

  • the business income (entire net income minus investment income)—8.85 percent of business income allocated to New York City;
  • the capital base—0.15 per cent of business and investment capital allocated to New York City, not exceeding $10 million; or
  • a fixed dollar amount based on the amount of New York City gross receipts (ranging from $25 to $200,000).

 

Unincorporated business tax is imposed at the rate of 4 per cent on taxable income allocated to New York City. Credit is provided to owners of the unincorporated business, although the calculation and use of the credit may be complex.

Exemptions, deductions and credits

What exemptions, deductions, and credits are available?

A variety of credits are available for New York State and New York City income tax, including for:

  • commercial production;
  • employee training incentives;
  • low-income housing; and
  • veteran employees.

 

Reduced tax rates are available for:

  • manufacturers;
  • specified technology businesses; and
  • small businesses.

 

Exemptions are available for publicly supervised utilities, and foreign corporations engaged in investing or trading securities for their own account.

Rental income or loss from real property located outside New York City, and gain or loss on the disposition of real property located outside New York City are not considered for the purposes of computing unincorporated business tax.

Filing requirements

What filing requirements and procedures apply? Are there special filing requirements for groups of company?

For New York State general corporation tax returns, the filing requirement is annually (on or before April 15 for calendar-year taxpayers, or 3.5 months after the end of the year for fiscal-year taxpayers). If the taxpayer expects to owe more than $1,000 in corporate franchise tax after credits, it must file quarterly and pay estimated tax. If a company satisfies the combined group test (generally, a 50 per cent ownership or control test), it must file as part of a combined return.

For New York State S corporations, the filing requirement is annually (on or before March 15 for calendar-year taxpayers, or 2.5 months after the end of the year for fiscal-year taxpayers).

Corporate franchise tax

Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?

New York State imposes general corporation franchise tax, which incorporates corporate income tax. There is no separate franchise tax for New York City.