Late last Wednesday, Governor Cuomo signed legislation, A10519/S08411, that decoupled additional provisions from the CARES Act for New York City Business Taxes. The legislation may have personal income tax considerations because the legislation has provisions that apply to New York City pass-through entity level taxes.
The legislation affects the following New York City Business Taxes:
- General Corporation Tax (GCT)
- Business Corporation Tax (BCT)
- Tax on Unincorporated Businesses (UBT)
- Bank Tax
“Justification” for The Legislation
The Assembly’s version of the legislation contains a pre-amble, “Justification,” that sets forth the need or concerns that precipitated the legislation’s adoption. As discussed in our prior New York State Budget “Decoupling” posts, with respect to NYC Business Taxes, the decoupling in Part WWW did not completely decouple from the Internal Revenue Code (IRC). Rather with respect to NYC Business Taxes, Part WWW decoupled from only the specific provisions of the IRC deductions for interest payments allowed pursuant to section 163(j)(10)(A)(i).
In particular, Part WWW did not decouple the City’s GCT, BCT, UBT or Bank Tax from the amendments made by the CARES Act to:
- Section 172 of the IRC, which regulates the amount of the net operating loss (NOL) deduction and when a deduction can be taken for NOLs.
- Section 461(1) of the IRC, which regulates the ability of non-corporate taxpayers to deduct excess business losses against other types of income.
- Sections 163(j)(10)(A)(ii) and 163(j)(10)(B) of the IRC, added by the CARES Act. The new clause (ii) of subparagraph (A) of paragraph (10) of subdivision (j) of Section 163 allows greater deduction of interest payments for partners in a partnership.
The “Justification” language provides insight into the legislators’ concerns as to the potential harmful affects that failing to decouple the aforementioned CARES Act provisions would have upon New York City tax revenues:
It is in the City’s fiscal interest to decouple the BCT, GCT, UBT and Bank Tax from both of these amendments. If the decoupling provisions in this bill are not enacted, New York City stands to lose at least $50 million in City fiscal year 2020/21 and $25 million in fiscal year 2021/22. Given that the City is facing a potential revenue gap of $5.4 billion in fiscal year 2020/21, the City cannot afford to lose these millions of dollars in revenue at this time.
The Decoupling – New York City Style – The Sequel
The Legislation amends the respective NYC Business Tax provisions specifically to disallow:
- Interest payments allowed pursuant to Section 163(j)(10)(A)(ii) of the IRC, and
- elections to use 2019 adjusted taxable income for taxable years beginning in 2020 allowed pursuant to Section 163(j)(10)(B) of the IRC.
- For purposes of the UBT, the amount of increase in the federal deduction allowed pursuant to any amendment to section 461(1) of the IRC made after March 1, 2020.
In addition, the legislation adopts amendments to NYC UBT, GCT and Banking Taxes that set forth that for taxable years beginning before January 1, 2021, any amendment to section 172 (“NOLs”) of the IRC made after March 1, 2020 shall not apply on specific basis to NYC Business taxes. As the legislation amends specific provisions of the UBT, the GCT, the BCT and the City banking tax, New York City business taxpayers and their advisors should carefully review the legislation’s potential ramifications.
The Legislation’s Ray of Hope
Does the Legislation provide a glimpse of a potential silver lining to the decoupling’s gray tax skies? Perhaps. Within the Assembly’s version, (stealthily) in the “Justification” contained in the Summary, there is language with respect to NOLs that states:
Note that regarding the amendments pertaining to the NOL deduction, taxpayers will not lose the ability to carryover unused NOLs caused by this bill to future tax years.
The above language, although not contained within the legislation’s amendments to the specific affected provisions, does appear to indicate that the State, at least with respect to the affected NYC Business Taxes, may provide additional guidance and possible relief from the potential whipsaw that may result from disparate Federal and NYC Business Tax NOLs arising from the decoupling. At this time, we may only cautiously await such possible additional guidance and relief.
As in the movies, just as Hollywood can’t seem to get enough of sequels and rarely do they successfully build upon their original, when it comes to New York’s decoupling, it appears that New York taxpayers and their advisors will have to endure a number of sequels – most of which will be painful.
Well now that Summer 2020 has arrived from a Solstice perspective – here’s to sunny days, fun and freedom once again in our Great Country!
From all of us at MWE – be safe, well and cool!