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State & Local Taxation

New York State Enacts 2017 - 2018 Budget Legislation

Wayne Berkowitz, CPA, J,D., LL.M. 04.20.2017 | Client Alert

New York State has finally enacted the budget for the 2017-18 fiscal year.  Passage was delayed due to many controversial proposals, a number of them not revenue related.  Some of the key provisions in the revenue section of the budget are discussed below.

No Change to Real Property Transfer Tax as it Relates to Minority Interest Transfers in New York State Real Property.  One of the Governor's key proposals would have applied the 0.4% New York State Real Property Transfer Tax to virtually all transfers of an entity owning an interest in real property.  The tax will continue to apply only to interest transfers of 50% or more with the current aggregation rules remaining in place.  Of key concern was that New York City would have followed any such change and subject minority interest transfers to their 2.625% tax.  For now, the law in both the State and City remain as it was before enactment of this year's budget.

Wealthy New Yorkers continue to be Subject to the "Millionaires Tax" and Charitable Contribution Limitations.  Scheduled to expire at the end of 2017, the top tax rate of 8.82% is extended for two more years, through 2019.  Single taxpayers earning over $1 million ($2 million for married taxpayers and $1.5 million for heads of households) would have seen the rate drop to 6.85% had the top rate not been extended.

Similarly, the limitation on charitable deductions was extended for two more years, through 2019.  New York taxpayers with income over $1 million, but not more than $10 million will continue to be limited to 50% of contributions, while those with income over $10 million will continue to be subject to the 25% limitation.

Sourcing Look-Through for Sale of Flow-Through Entities May Subject Nonresidents to Tax on the Sale of Entity Interests.  With certain exceptions for flow-through entities owning certain target amounts of New York real property, prior law allowed nonresident individual taxpayers to sell an interest in a flow-through entity (as opposed to an asset sale) with none of the gain recognized  subject to New York tax.  The new law, effective immediately, states that where the transfer of a membership interest is subject to Section 1060 of the Internal Revenue Code and a gain is recognized for federal income tax purposes, there will be an allocation of New York source income consistent with the rules already in place.  Section 1060 imposes a certain purchase price allocation methodology in a sale of assets constituting a trade or business, and applies to certain partnership interest transfers as well.  The new section is short on details as to its application, but is aimed at entity members receiving the benefit of a basis step-up on the partnership assets, while no New York source gain has been subject to tax.

Look-Through Provision for Entities Owning New York Real Property Expanded to Include Cooperative Housing Shares.  Nonresident individuals owning an interest in a flow-through entity or certain closely held corporations, where real property represents 50% or more of the value of all of the assets on the date of the sale, are required to include a portion of any gain from the entity sale as New York source income.  Prior law excluded shares in cooperative housing corporations from the definition of real property. Effective immediately, the budget legislation includes cooperative housing shares as real property for this purpose.

Use Tax Exemption Clarified.  A nonresident individual (defined differently for the Use Tax than the Income Tax) who previously purchased property or services subsequently brought to New York is generally not subject to use tax.  Under the new law, effective immediately, this exemption does not apply to a nonresident that is not an individual, unless the nonresident has been doing business outside of New York for at least six months from the time the property or service is brought into New York.

Definition of Retail Sale Extended to Include Sales to Related Entities. Under existing law, purchasers can generally buy tangible personal property for resale exempt from sales tax, regardless of who the property will be resold to. Under the new law, effective September 1, 2017, purchases for resale where the item purchased is to be resold to a related entity of the purchaser will now be subject to tax as a retail sale.

Credits Extended, Enacted, and Expanded. The enacted budget bill establishes a number of new credit programs and extensions of critical existing programs.  The budget bill establishes a life sciences credit designed to attract and retain firms in life sciences to locate, invent, commercialize, and produce in New York.  The new law also includes record funding of more than $15 million for dozens of job training and workforce development initiatives including an expansion of the Workforce Training Credit Program.  Additionally, the Film Production Tax Credit program has been extended for three years through 2022. 

Questions? Contact Wayne Berkowitz, CPA, J.D., LL.M., Terence Avella, J.D., LL.M., or your Berdon advisor.

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