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NYS Decoupling from CARES Act – Section 163(j) Limitation – How to Make Complicated More Complicated

New York Budget Header Post 3 - NYS Decoupling from CARES Act – Section 163(j) Limitation – How to Make Complicated More Complicated

In our two previous posts on the New York State Budget’s Decoupling {“Decoupling”}, we discussed the myriad of implications arising from the Decoupling that focused on the Personal Income Tax as well as Pass Through Entity (PTE) ramifications to the extent the Decoupling’s affects would be required to be reflected by PTEs for their individual owners. In this post, we will discuss the Decoupling’s more focused considerations with respect to Section 163(j).

First, it is significant to re-iterate that the provisions of Part WWW that sets forth the Decoupling of New York State and City’s rolling conformity to the Internal Revenue Code (IRC) to a “fixed” conformity date with respect to Personal Income Tax purposes decouples from the IRC in its entirety. As mentioned in our previous posts, Part WWW explicitly Decouples from NYS and NYC conformity with the IRC for NYS and NYC Personal Income Tax purposes; i.e. with respect to any amendments to the IRC enacted after March 1, 2020, for tax years beginning before January 1, 2022.

The provisions of Part WWW that address the Decoupling for New York State Corporate, New York City Corporate and New York City Unincorporated Income tax purposes do not decouple from the IRC in its entirety. The subsections of Part WWW applicable to New York State and City Decoupling for corporate/business taxes purposes limit the decoupling to specific provisions of the CARES Act. The Decoupling provisions at Part WWW for New York State and City corporate/business taxpayers decouple from the CARES Act beneficial provisions with respect to the limitations set forth at Section 163(j).

Finally, the Decoupling from the CARES Act beneficial Section 163(j) provisions also apply to New York individual income taxpayers as the Decoupling with respect to Personal Income Taxes decouples from the IRC in its entirety as of the effective date of the New York State Budget provisions set forth in Part WWW, i.e. any amendments to the IRC enacted after March 1, 2020, for tax years beginning before January 1, 2022.

The Decoupling from CARES Act 163(j) Ramifications

Section 163(j) – Pre CARES Act

In general, prior to the CARES Act, IRC Section 163(j) limited the deduction for Business Interest Expense (BIE) to the sum of:

  1. The taxpayer’s business interest income;
  2. 30% of the taxpayer’s adjusted taxable income (ATI); and
  3. the taxpayer’s floor plan financing interest expense for the taxable year.

Section 163(j) – CARES Act

The CARES Act amends IRC Section 163(j) with respect to taxable years beginning in 2019 and 2020. The CARES Act increases the 30% ATI threshold to 50% for taxable years beginning in 2019 and 2020. In addition, the CARES Act allows taxpayers to elect to use their 2019 ATI as their ATI in 2020.

The Decoupling from 163(j) – Corporate Tax Considerations

By Decoupling, the State will not follow the CARES Act’s increasing of the IRC Section 163(j) limitation from 30% of ATI to 50% of ATI for 2019 and 2020 tax years.

Therefore, with respect to taxpayer subject to New York State Corporate tax (Article 9-A) and certain New York City business income taxes (Business Corporation Tax, General Corporation Tax and Unincorporated Business Tax), the BIE will be limited to 30% of a taxpayer’s ATI plus its business interest income and floor plan financing interest expense for the taxable year consistent with the pre-CARES Act IRC limitations.

Thus the Budget Act provision will require separate IRC Section 163(j) calculation and tracking of the New York limit and any resultant carryover of excess interest expense not utilized. What could be potentially more significant is that as a result of the lower 30 percent limitation in New York as compared to federal, it’s possible that a taxpayer could have a New York interest expense limitation and no federal interest expense limitation for any tax years covered by the Decoupling most notable for tax years beginning in 2019 or 2020.

There is a limited exception to the aforementioned Decoupling in that the Budget Act amendment does not apply to IRC Section 163(j)(10)(B)(i). Therefore, New York State and City Corporate taxpayers should thoroughly review the potential benefits of the Decoupling exception for IRC Section 163(j)(10)(B)(i) when computing the New York BIE limitation for the State and City business taxes.

The Decoupling from 163(j) – Personal Tax Considerations

As mentioned earlier in this post, Part WWW explicitly decouples NYS conformity with the IRC for Personal Income Tax purposes; i.e. any amendments to the IRC enacted after March 1, 2020, for tax years beginning before January 1, 2022. Consistent with the Decoupling’s affect with respect to the New York State and City Corporate and business taxpayers, the CARES Act beneficial amendments to IRC Section 163(j)’s BIE limitation are not applicable to New York State personal income taxpayers who itemize for Federal tax purposes. It should be noted that New York State individual taxpayers may elect to use their New York State Itemized Deduction in lieu of their Federal Itemized Deductions in determining their New York State taxable income. Such an election may mitigate the sting of the Decoupling’s affect on the BIE subject to any pre-TCJA Section 163(j) limitations.

For New York personal income taxpayers who itemize for Federal income tax purposes that do not elect to use New York Itemized Deductions, such taxpayers’ BIE will be limited to 30% of ATI.

Regardless of whether a New York individual taxpayer elects to use their New York Itemized Deductions, New York individual taxpayers may not substitute their 2019 ATI on 2020 returns, as allowed by the CARES Act, in computing the BIE limitation.

The Take Away – BIE Limitations for NY Taxpayers Become More Demanding & Onerous

If there is one point of certainty that one may take away from New York State’s Decoupling is that every New York State and City taxpayer must exercise extra caution to timely identify and navigate the highly complex ramifications of New York’s Decoupling from the CARES Act!

Well at least as summer approaches our days are getting longer and the weather is improving.

From all of us at MWE be safe and well as we greet the coming of The Summer 2020!


Post 2: NYS Budget Decoupling from Beneficial CARES Act Provisions Creates NOL and Excess Business Loss Complexities

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

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