SALT Strategies

Batter up – The NYS 2021-22 Budget – Is It a Home Run or Strike Out for New York State Taxpayers and Businesses?

NYS 2021 Budget LI - Batter up - The NYS 2021-22 Budget - Is It a Home Run or Strike Out for New York State Taxpayers and Businesses?

Spring has officially arrived – flowers are blooming, baseball has begun, and Governor Cuomo signed the 2021-22 New York State (NYS) Budget on April 19, 2021. This year, Albany has been quite engaged in its attempt to enhance New York State’s “field of taxes.”yankee stadium - Batter up - The NYS 2021-22 Budget - Is It a Home Run or Strike Out for New York State Taxpayers and Businesses?

As with each spring, the 2021-22 NYS budget package contains numerous tax provisions that affect both individuals and businesses. The NYS 2021-22 Budget that was signed by the Governor (S.B. 2509 C) {“The Budget”} includes corporate franchise, personal income, property, sales and use tax modifications.

Please note, this year New York State’s Budget adoption process provided additional intrigue for any tax fan as the State Senate Legislative website indicates that S2509 as well as S2509 C were “signed by the Governor.” As Senate Bill S2509 C materially modifies Senate Bill S2509 tax provisions with respect to the enacted New York State Pass-through Entity Tax (PTE), to the casual tax fan these inconsistencies may cause some concern. As further discussed below, S2509 C appears to address these inconsistencies.

Significant Tax Provisions in the Budget Bill

Per the Senate’s webpage discussing the Budget Bill, the following excerpt summarizes some of the significant tax changes in The Budget delivered to and signed by the Governor:

  • Increases the current top state personal income tax rate of 8.82% rate to 9.65% for individual filers whose income is over $1 million and joint filers over $2 million;
  • Establishes two new brackets at a rate of 10.30% for those whose income is between $5 million and $25 million and 10.90% for those whose income is over $25 million;
  • Increases the Corporate Franchise Tax Rate from 6.5% to 7.25% for three years, while leaving the rate of 6.5% unchanged for companies with under $5 million in income;
  • Restoring the capital base test at a rate of 0.1875%, while exempting coops, manufacturers and small companies.

In addition, The Budget provides tax cuts for Middle-class New Yorkers:

  • People in the $43,000-$161,550 income bracket that file jointly will see their tax rates lowered from 6.09% to 5.97%;
  • People in the $161,550-$323,200 income bracket that file jointly will see their tax rates lowered from 6.41% to 6.33%.

The Budget’s Adoption of a New Pass-through Entity Level Tax and Credit for Personal Income Taxes

The Budget establishes a new and elective PTE tax that is available to eligible partnerships and S corporations. The following are the significant aspects of The Budget’s PTE tax.

1. Effective For Tax Years Beginning On or After January 1, 2021. S2509 C in Part C § 9 states “This act shall take effect immediately and shall apply to all taxable years beginning on or after January 1, 2021.” It should be noted that S 2509 indicated that the PTE tax was applicable for tax years on or after January 1, 2022.

2. Graduated Rates That Parallel New York State’s New Higher Personal Income Tax Rates. As set forth in S2509 C § 862, the PTE tax will be determined at the following rates:

  • Income not over $2 million – 6.85%;
  • Income over $2 million but not over $5 million – $137,000 plus 9.65% of the excess over $2 million;
  • Income over $5 million but not over $25 million – $426,500 plus 10.30% of excess over $5 million;
  • Income over $25 million – $2,486,500 plus 10.90% of the excess over $25 million.

3. The PTE Election Due Date: The PTE Election Due Date is October 15, 2021 for 2021 tax year. Initially S2509 C sets forth in § 861 (c) “that for eligible calendar year partnerships or S corporations, “The annual election must be made by the due date of the first estimated payment under section eight hundred sixty-four of this chapter and will take effect for the current taxable year.”

However, the first quarter estimated payment per § 864 was due on March 15, 2021. This would appear to preclude calendar year eligible partnerships or S corporations from making the election for calendar year 2021.

The State apparently realized this issue and remedied the PTE Election Due Date by adopting § 8 of Part C that states in part “(a) Notwithstanding section 861 of the tax law, as added by section one of this act, the election to be taxed under article 24-A of the tax law for the calendar year 2021, must be made by October 15,2021.”

4. 2021 PTE Estimated Payments: § 8(a) of Part C sets forth in part “Further, notwithstanding section 864 of the tax law, as added by section one of this act, an electing partnership and an electing S corporation shall not be required to make estimated tax payments for taxable year 2021.” Please note that § 8(a) only applies to taxable year 2021.

Please Note that with respect to Personal Income Tax Estimated Payments required to be made by partners of electing eligible partnerships or by shareholders of electing eligible S corporations making the PTE Election § 8(b) of Part C sets forth:

For taxable year 2021, taxpayers under article 22 of the tax law who are partners, members or shareholders of electing partnerships and electing S corporations shall continue to make estimated tax payments as required by such article, calculated as if they were not entitled to the tax credit allowed by subsection (kkk) of section 606 of the tax law, as 10 added by section two of this act.

Therefore, partners of eligible partnerships and shareholders of eligible S corporations that anticipate making a PTE Election for 2021 should continue to calculate and remit their 2021 New York State personal income tax estimated payments without regard to the credit for the PTE tax that will be paid by their respective eligible electing partnership or S corporation.

5. Only one election may be made during each calendar year. An election made under this section is irrevocable.

As experience with the New Jersey BAIT has taught us, the implementation of the New York State elective PTE tax will require careful analysis as well as close monitoring of the State’s implementation of this potentially beneficial election.

Mandatory Federal S Corporation and New York State S Corporation Election Conformity

Pre Budget – Separate New York State S Corporation Election for Eligible Corporations

Prior to the adoption of The Budget, those corporations that elected S corporation status for Federal Corporate income tax purposes that wished to be an S corporation for New York State Corporate Income tax purposes were required make a separate New York State S corporation election as set forth in § 606. Only “eligible” Federal S corporations were permitted to make a New York State S corporation election under New York State § 606.

In general, prior to revisions adopted by The Budget, per § 606 an eligible corporation was:

  1. An S corporation that that is subject to tax under article nine-A of this chapter, or;
  2. An S corporation which is the parent of a qualified subchapter S subsidiary subject to tax under article nine-A.
    • where the shareholders of such parent corporation are entitled to make the election under this subsection by reason of subparagraph three of paragraph (k) of subdivision nine of section two hundred eight of this chapter.

Therefore, the shareholders of an eligible Federal S corporation had discretion as to whether to make a separate New York State S Election.

Mandatory Federal S Corporation and New York State S Corporation Election Conformity

Per The Budget’s modifications to § 606, an eligible Federal S corporation no longer has the option of making or not making a New York State S corporation election. Every eligible Federal S corporation will be deemed a New York S corporation.

In addition, The Budget modifies § 606 with respect to what is an “eligible” corporation by redefining an “eligible” S corporation by deleting the following from § 606 “where the shareholders of such parent corporation are entitled to make the election under this subsection by reason of subparagraph three of paragraph (k) of subdivision nine of section two hundred eight.”

Unemployment Compensation for Undocumented Immigrants

In light of the recent New York Times article that indicates that the current New York State Budget contains a $2.1 billion provision to provide unemployment compensation to undocumented immigrants there was a renewed hope that the State would follow the Federal exclusion of up to $10,200 of unemployment compensation (as allowed under the American Rescue Plan Act of 2021) for affected New York residents. However, according to New York State’s COVID FAQ Website, the exclusion does not apply to NYS tax.

The FAQ provides additional guidance as to how affected taxpayers should address this as follows:

If you have not yet filed your 2020 New York State return, and file using software, the software should already account for this update and add back the unemployment compensation excluded from federal gross income. If you do not file using software, make sure to add back the federal unemployment compensation exclusion.

If you already filed your 2020 New York State return, and you did not add back unemployment compensation that was excluded from your federal gross income, then you must file an amended return with New York State. If you did not exclude unemployment compensation from your federal gross income, do not file an amended return with New York State.

As with every spring, baseball fans and New York taxpayers have high hopes and anxieties for the year ahead. Here’s hoping that our best wishes for both come true.

*Please note that this post revises and replaces our previous “Batter up – The NYS 2021-22 Budget – Will It Be a Home Run or Strike Out for New York State Taxpayers and Businesses?” from April 16, 2021.