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NYS Budget Decoupling from Beneficial CARES Act Provisions Creates NOL and Excess Business Loss Complexities

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

New York Budget Header 1 1 - NYS Budget Decoupling from Beneficial CARES Act Provisions Creates NOL and Excess Business Loss Complexities

In our previous post on New York State’s 2020-21 Budget, we identified several of the significant issues  presented by New York’s Budget containing specific provisions which set forth that New York State will temporarily suspend adoption of the Internal Revenue Code (IRC) on a rolling basis {‘Decoupling”}.

New York State’s Decoupling from the IRC is for tax years beginning before January 1, 2022 with respect to the amendments made to the IRC after March 1, 2020, i.e. the CARES Act.

This post will discuss the Decoupling’s ramifications with respect to New York State and New York City Personal Income taxpayers.

Personal Income Tax Considerations

The CARES Act provided numerous Federal tax benefits to individual income tax payers.  Those benefits include enhancements or acceleration of business losses, depreciation expense and net operating losses.  The Federal tax technical and procedural complexities pertaining to the benefits in light of the Decoupling present a myriad of New York State and New York City Personal Income Tax concerns, questions and potential inequitable ramifications.

The following identifies those benefits and the potential New York State and City Personal Income Tax concerns on an issue specific basis.  With that said, the Decoupling presents complex tax questions as those issues are interdependent based on the application of the Federal CARES Act tax provisions {“The Act”}; i.e. The Act’s Excess Business Loss provisions may generate a Net Operating Loss that may be carried back for which the Decoupling poses interdependent New York tax ramifications.

  1. Qualified Improvement Property (QIP)

The Act amends the Internal Revenue Code to fix what has commonly been referred to as the “retail glitch”.  The Act’s addressing of the retail glitch is actually a technical correction to the definition of what QIP is as set forth in the 2017 Tax Cuts & Jobs Act (TCJA).

As set forth in our CARES Act insight, The Act corrected the retail glitch as follows:

  • QIP is now included in the 15 year property category under Code Section 168(e)(3)(E), and is therefore eligible for 100% bonus depreciation, meaning immediate expensing for Federal income tax purposes.
  • This change is effective as if it were included as part of the 2017 TCJA. Therefore, qualifying property placed in service after September 27, 2017 is now properly classified as 15 year property and eligible for bonus deprecation.
  • QIP was previously defined under TCJA as any improvement to an interior portion of a building that is nonresidential real property as long as that improvement is placed in service after the building was first placed in service by any taxpayer. QIP specifically excludes expenditures for (1) the enlargement of a building, (2) elevators or escalators, or (3) the internal structural framework of a building. The CARES Act adds to this definition the requirement that the improvements must be made by the taxpayer.

Despite the fact that The Act addresses the retail glitch as a technical correction to the 2017 TCJA, for New York State and City Personal Income Tax purposes, The Budget provisions at Part WWW Decouples from The Act’s beneficial provisions with respect to QIP as summarized above.  For New York State and City Personal Income Tax purposes, any Federal tax benefit with respect to the technical correction to the TCJA for QIP is not applicable.

As the CARES Act QIP remediation may require pass through entities to amend their Federal returns, such affected pass through entities may issue amended K-1’s to the investee members, partners or shareholders.  Due to the Decoupling, individual investees or owners of such affected pass through entities that are required to file New York State or City Personal Income tax returns, i.e. resident or nonresident, will be required to identify and appropriately modify such Federal QIP adjustments in determining their New York State and City Personal Income Tax.

The aforementioned requisite Federal QIP benevolent modifications under the CARES Act may also cause Net Operating Losses (NOLs) at the individual investee level for Federal individual income tax purposes that may be carried back five years for federal income tax purposes but only two years for New York State Personal Income Tax purposes.

  1. Excess Business Losses

The TCJA enacted IRC Section 461(l) that limits the ability to use current year business losses to offset non-business income (such as portfolio interest, dividends, capital gains, etc.) to $250,000 ($500,000 for married taxpayers filing a joint return).  The Act suspended the limitation imposed by IRC Section 461(I) for tax years 2018 through 2020.

For New York State and City Personal Income Tax purposes as a result of the Decoupling, the TCJA IRC Section 461(I) is not suspended.  Therefore, affected New York state individual taxpayers must track and modify their allowable and limited Excess Business Losses independent of the amounts provided under the Cares Act.

Further complicating this issue, The Act’s suspension of the Excess Business Loss limitation as set forth in IRC Section 461(I) coupled with The Act’s QIP technical correction, may result in NOLs for the 2018 and 2019 tax years.

  1. Net Operating Losses

Pursuant to the TCJA NOLs from 2018, 2019, & 2020, are only eligible to be carried forward to potentially offset future taxable income.  The Act permitted such NOLs from 2018, 2019 and 2020 to be carried back potentially reducing taxable income for the five previous tax years.  Taxpayers may elect to forego the carryback and carryforward instead.

In addition, the TCJA limited the utilization of NOLs carried to 2019 & 2020 to 80% of taxable income. The Act permits that such NOLs may now offset 100% of taxable income for those tax years.

The Decoupling creates a number of issues with respect to NOLs.  First, the Decoupling maintains the New York NOL carryback period to that permitted prior to The Act.  As set forth in New York Publication 145 (on page five), the New York State NOL carryback period mirrors the Federal, i.e. two years.

In addition, the publication sets forth additional New York State NOL limitations that may be further exacerbated by The Act’s extended five year NOL carryback period per the below excerpt:

Your federal NOL is used to determine the amount of the NOL deduction, if any, that is allowed on your New York return. Therefore, if you are a resident and you do not have an NOL for federal income tax purposes, you cannot have an NOL deduction for New York State income tax purposes.

 For New York State income tax purposes, your NOL deduction for a carryback or carryforward year is limited to the lesser of your:

  • federal NOL deduction for that year, or
  • federal taxable income for that year (computed without the NOL deduction).

The guidance indicates significant New York State and City individual taxpayer ramifications arising from the Decoupling.  Should a New York individual taxpayer decide to carryback a NOL pursuant to the enhanced NOL carryback period per The Act, i.e. five years, any federal NOL utilized in the third, fourth or fifth carryback years reduces the potential New York NOL available to offset a New York individual taxpayer’s taxable income in any subsequent year.

This potential loss of a portion or all of the New York tax benefits, should an individual decide to carryback a NOL for Federal tax purposes under the enhanced carryback period provided by The Act, requires immediate discussion, analysis and planning by potentially affected taxpayers.

The Act and Decoupling – Time is of the Essence

As you are now aware, the Decoupling poses significant tax issues that require a thorough analysis of the complex ramifications for any New York State or City individual taxpayer seeking to pursue the Federal tax benefits provided by The Act.  It is our wish that our discussion will facilitate those affected New York individual taxpayers to seek appropriate tax advice in determining an appropriate tax course of action.

In our next post we will discuss the Decoupling implications of Section 163(j) as well as some of the compliance challenges posed by the Decoupling.

In the midst of this most unusual time, it may be easy to focus on the challenges we face and lose perspective of how quickly time passes.  Candidly, I was a bit amazed that we have arrived at Memorial Day weekend.  My humble wish – may the meaning of Memorial Day be a source of reflection, renewed perspective and re-invigoration for all of us in these most challenging of times.

Until our next post, from all of us at MWE, be safe, well and enjoy your Memorial Day and weekend.

Post 1: NYS Budget Decouples from Beneficial Cares Act Tax Provisions

Post 3: NYS Budget Decoupling from Beneficial CARES Act Provisions Creates NOL and Excess Business Loss Complexities