The New York State Fiscal Year 2018 — 2019 Budget Bill (the Bill) was approved by the Senate and Assembly and signed by Governor Cuomo on March 31, 2018. Although the Bill made some significant changes, which are discussed in detail below, it is worth noting that not all proposed changes were included in the final version. Most notably, the final Bill did not include provisions:
Much of the Bill came from the Governor’s thirty-day amendments, which took some bold steps in an attempt to mitigate tax increases imposed on New Yorkers by the Federal Tax Cuts and Jobs Act (TCJA).
Provisions Influenced by the TCJA
Treatment of Mandatory Repatriation of Income Mandated Under TCJA
For both New York State and New York City Corporations, the new legislation makes it clear that the mandated repatriation of foreign income under IRC section 965 will not be included in the corporate tax base. Any deductions permitted for federal tax purposes will be added back so that corporate taxpayers will not yield a double benefit.
However, the new law makes no provision for individual taxpayers to exclude the repatriated income. Absent any further change, New York State will be receiving a large tax windfall from individual shareholders of non-U.S. Corporations subject to the repatriation inclusion. Accordingly, the net amount reported as other income for federal income tax purposes will be included for New York as well. While for federal tax purposes, the income can be spread out over an eight-year period, recently-issued Notice N-18-4 provides that the entire repatriation amount will be subject to tax in New York in the inclusion year.1
For additional information on the federal section 965 inclusion, see:
Treatment of Global Intangible Low-Taxed Income (GILTI)
New IRC § 951A of the TCJA taxes a U.S. shareholder on income from controlled foreign corporations (CFCs) to the extent the income is in excess of a fixed return on the tangible assets of such CFCs. The newly created category of taxable income, Global Intangible Low Taxed Income, (GILTI) is subject to tax at regular income tax rates, but under new IRC § 250, a deduction is allowed for 50% of the amount included in income. This effectively means GILTI is taxed at a 10.5% tax rate for federal purposes. Additionally, foreign tax credits (FTCs) are also available to offset GILTI at the federal level at a rate of 80%.
The Bill does not specifically address GILTI. Therefore, both GILTI and the 50% GILTI deduction under IRC § 250 are included in the computation of New York taxable income. The Bill also amends the subtraction modification related to IRC § 78 gross ups to limit the subtraction modification to dividends that were not included in the IRC § 250 deduction. This change was necessary to prevent taxpayers from double dipping on deductions related to IRC § 250.
For more on the GILTI tax, see:
Minimizing the TCJA’s Impact on Individual Taxpayers
Charitable Gifts Trust Fund: In an effort to lessen the impact of the TCJA’s limitation on the state and local tax (SALT) deduction, the Bill authorizes New York taxpayers to pay their “taxes” into two state-operated charitable funds dedicated to health and education, respectively.
Taxpayers donating to either fund may claim the contributions as a charitable deduction on their Federal tax returns (in lieu of the SALT deduction) for the year in which the contribution is made beginning with the 2018 tax year. A credit equal to 85% of the qualifying contribution made in the immediately preceding tax year will be first available on the 2019 return.
A taxpayer that pays $100 into the “charitable gifts trust fund” in 2018 may claim that payment on their 2018 Federal return as a charitable contribution and would thereafter be entitled to an $85 credit against his or her 2019 New York State income tax.
The Bill also authorizes local governments, municipalities and school districts to establish similar charitable funds. Contributions into these local funds would presumably be in lieu of New Yorker’s real property and school taxes and would presumably qualify for the Federal charitable deduction and State income tax credit.
Though the Bill is seemingly effective in bypassing the limited SALT deduction, it remains unclear whether the IRS will treat these contributions as charitable donations for federal income tax purposes. Moreover, the mechanics for contributing to these funds needs further clarification from the State as well as localities if, and when, the local funds are created. The New York State Department of Taxation and Finance is currently developing guidance on this matter.
Employer Compensation Expense Tax: The Bill creates a new optional Employer Compensation Expense Tax (ECET) as an alternative workaround to the limited SALT deduction. Employers making the annual election would pay tax on the payroll expense for certain employees earning more than $40,000 annually. Phased-in over a three-year period, the tax rate for 2019 will be 1.5% and will increase to 3% in 2020 and 5% in 2021 and all subsequent years.
While the ECET would not replace the personal income tax, the Bill provides a new tax credit that corresponds with the tax paid by the employer to offset a portion of an employee’s New York personal income tax liability. The credit is equal to a covered employee’s wages in excess of $40,000, multiplied by the applicable ECET rate, times one minus a fraction of the employee’s personal tax liability prior to any credits over the employee’s taxable income for the applicable year.
An employee with an annual salary of $200,000 having a tax liability of $15,000 before credits, would be entitled to an income tax credit equal to $7,400 [$160,000 x 5% x (1 - $15,000/$200,000)] once the ECET is fully phased-in. As a result, the employee’s state personal income tax is reduced below the $10,000 SALT deduction cap. This frees up space for deducting at least a portion of his or her real property taxes should the IRS shut down the charitable fund approach.
Additionally, the employer would be entitled to a deduction on its return for the additional taxes paid, thereby shifting the individual capped SALT deduction to a fully deductible business expense as intended. Is unclear, however, whether employers will elect to pay the tax. While the deduction relieves some of the burden of the added tax, employers are prohibited under the Bill from reducing wages by any amount representing the ECET. Thus, employers would be out-of-pocket for the majority of the added cost, calling into question an employer’s incentive to participate.
Partial Decoupling from the Internal Revenue Code: Federal tax reform eliminated certain benefits and deductions that New York State wishes to preserve for individual taxpayers. To do so, modifications were made to the State’s law to preserve the following items:
Additionally, when itemizing for New York, the deductions allowed will be those that were allowed prior to the changes made by Federal tax reform. As a result, local real property taxes would continue to be deductible, even if in excess of the federal cap of $10,000 set for all state and local taxes.
Statutory Residency Status Clarified
Amendments in the Bill clarify that in determining whether an individual taxpayer is a statutory resident and specifically whether the taxpayer was present in New York (State and/or City) for more than 183 days, the day count would include the entire year, whether or not the taxpayer was domiciled in New York for part of the year.
Under New York law, taxpayers are deemed residents of New York if they are either domiciled in the State, or they maintain a permanent place of abode in New York and are present in New York for more than 183 days. Uncertainty arose, however, surrounding the day count where a taxpayer was domiciled in New York for only part of the year:
Ms. Jones, domiciled in New York State and City through August 31, 2018, moved to Los Angeles with her entire family. She and her family have no intentions to return to New York but keep the New York City condominium. Ms. Jones was present in New York City every day prior to the move and for only 10 days from September to December.
Prior to the amendment, one could argue (although the Tax Department disagreed) that Ms. Jones was a part-year resident through August 2018 and a nonresident for the rest of the year. Ms. Jones would argue that only the days during her non-domicile period could count towards the statutory residency test.
The Tax Department’s view is, and the amendments to the statute now make it clear, that Ms. Jones is now a full-year resident of New York. Despite changing domicile on August 31, her maintenance of a permanent place of abode (she kept the condominium for all of 2018) and being present for more than 183 days (since the entire year can now be looked to for the day count) she is a full-year resident.
Statute of Limitations Extension on Amended Returns
The Bill extends the statute of limitations for both NYS and NYC personal and business income tax purposes. The change allows for an assessment of tax or recovery of a previously paid refund that is attributable to a change or correction on an amended return any time within one year after the amended return is filed. The Governor’s proposal included an extension period of three years, but the more limited one-year period was enacted. These provisions are effective immediately and apply to amended returns filed on or after the effective date of the Bill.
Sales and Use Tax — Resale Exclusion for Prepared Food and Beverages
The Bill amends § 1105(d)(i) of the tax law which discusses the imposition of sales and use tax in New York for sales made by restaurants, taverns, caterers, and other similar businesses (“business operator(s)”). § 1105 now grants a resale exclusion to these business operators when purchasing prepared food and beverages for resale. Prepared food and beverages refers to platters, heated prepared food, sandwiches, etc. and prepared beverages (hot coffee etc.) that are ready for immediate consumption. Previously, New York State did not allow these business operators to purchase prepared food and beverages with a resale certificate. The business operator was required to pay sales tax to its suppliers even though they were going to charge sales tax to its customers on the same items. However, the State allowed the business operators to take a credit on their quarterly sales tax returns for the sales tax paid to its suppliers. By allowing business operators to issue a resale certificate on the purchase of prepared food and beverages, the new law simplifies the process by cutting out the burden of having to take a credit for the sales tax paid to suppliers. Business operators are still required to collect and remit sales tax on the sales of prepared food and beverages to its customers when the sale or services are provided in New York.
Sales and Use Tax — Responsible Person Relief
Section 1131(1), which discusses persons liable to collect sales tax, has been amended. The amendment codifies an existing Department of Taxation & Finance Technical Memorandum, and the law now grants certain limited partners and LLC members, who are responsible persons, relief from the sales tax liabilities of the business. The law will prevent unreasonable assessments for eligible responsible persons who would otherwise be fully liable under § 1131(1) for any outstanding liabilities of the business. Limited partners and LLC members whose ownership interest and share of profit and losses are less than 50% and who can demonstrate that they were not under a duty to act on behalf of the business in complying with the tax law can seek tax relief. General partners and LLC members holding more than 50% ownership interest in the LLC are not eligible for the relief. Under the new law, eligible persons cannot be held accountable for penalties owed by the business. In addition, the law will only hold eligible persons liable for outstanding sales tax liabilities by assessing them on the higher of the eligible person’s ownership percentage in the business or the person’s share of profit and losses in the business.
Berdon LLP New York Accountants
1 Notice N-18-4 also provides that S corporation shareholders will be subject to NY tax in the inclusion year notwithstanding the elective federal deferral of tax liability until the occurrence of a specified “triggering event.