Sarah Kim, J.D., LL.M. and Ken Maeng, J.D.
1.27.21 | Client Alert
Governor Andrew Cuomo has unveiled his Fiscal Year 2022 budget that proposes legislation (the “Budget Bill”) to respond to the economic crisis resulting from the COVID-19 pandemic. Below are highlights of the key tax-related provisions. Please note that proposed tax increases are dependent upon the timing and amount of new federal aid New York might receive as well as approval of the Budget Bill by the State Senate and Assembly.
Temporary Personal Income Tax Surcharge on High-Income Taxpayers. For tax years 2021 through 2023, taxpayers with income over $5 million would be subject to a temporary income tax surcharge. If approved, the surcharge would be imposed at the following rates:
- 0.5%, if the taxpayer’s income exceeds $5 million but not $10 million;
- 1%, if the taxpayer’s income exceeds $10 million but not $25 million;
- 1.5%, if the taxpayer’s income exceeds $25 million but not $50 million;
- 1.75%, if the taxpayer’s income exceeds $50 million but not $100 million; and
- 2%, if the taxpayer’s income exceeds $100 million.
This would raise the top New York State tax rate to 10.82%, from the current 8.82%. The surcharge would increase the New York City income tax top rate to 14.7%, the highest combined tax rate in the nation. The Budget Bill provides some relief from the surcharge by permitting taxpayers to pre-pay their surcharge liability for tax years 2022 and 2023 with 2021 estimated payments. Taxpayers who pre-pay their surcharge liability can deduct the prepayments for income tax purposes in 2024 and subsequent years.
One Year Delay of Middle-Class Tax Cut. The continued phase-in of the Middle-Class Tax Cut that began in 2018 will be delayed by one year. This means that, for the tax year 2021, middle-class taxpayers would be subject to the 2020 income tax rate schedule, followed by a one-year delay for each applicable tax year until the cut is fully phased in by 2026.
Optional Pass-Through-Entity Tax. Beginning on or after January 1, 2022, partnerships and S corporations may make an annual election to pay pass-through entity tax at the rate of 6.85% on the New York sourced income of partnerships and S corporations whose partners or shareholders consist solely of individuals. The optional tax is designed to provide a federal deduction for state taxes paid at the entity level to help offset the tax impact of the limited itemized deduction currently available for federal income tax purposes.
Pass-Through Entity Tax Credit. Partners and shareholders electing to pay the pass-through entity tax will be entitled to a credit equal to 92% of their distributive or pro rata share of taxes paid by the entity against their New York state personal income tax. The Budget Proposal clarifies that residents of New York would be allowed a credit for any substantially similar pass-through entity tax paid to other states.
Treatment of Federal S corporations. Beginning on or after January 1, 2022, all federal S corporations and qualified subchapter S subsidiaries will be treated as subchapter S corporations for franchise tax purposes. Currently federal S corporations are treated as C corporations unless they elect S corporation status in New York.
Extension and Amendments of Film Tax Credit. The Empire State Film Production Credit and Postproduction Credit will be extended for an additional year through 2026.
Berdon LLP New York Accountants