SALT Alert: New York State 2017-2018 Budget

By Steven P. Bryde  |  April 21, 2017

New York State Governor Andrew M. Cuomo signed the 2017-2018 State Budget. The bill contains a variety of corporate franchise, personal income, and sales/use tax changes. 

This year’s budget proposal contains a number of extenders and measures focused on compliance. The final budget may, however, be more notable for the original January proposals that were removed from the final budget, as opposed to what remained. Next, State legislatures, including New York’s, will likely be focused on addressing the effects of foreseeable federal tax law changes.

  

Millionaire’s Tax & Personal Income Tax

The Millionaire’s Tax, which was set to expire on December 31, 2016, will be extended for two years.This tax establishes a Personal Income Tax (“PIT”) rate of 8.82 percent for single filers earning more than $1 million, and married couples earning more than $2.1 million. The tax is expected to raise $3.4 billion of revenue in FY 2017-2018, and will be generated from approximately 45,000 taxpayers – half of whom are nonresidents.

As a result of the extension of the Millionaire’s Tax, 2018 PIT rates for taxpayers with incomes between $40,000 and $300,000 will be reduced as follows:

• Taxpayers with incomes between $40,000 and $150,000 will be reduced from 6.85 percent to 6.45 percent; and
• Taxpayers with incomes between $150,001 and $300,000 will be reduced from 6.85 percent to 6.65 percent.

These reductions are expected to save taxpayers $6.6 billion over four years, and cover more than 4.4 million New York residents.

Middle Class Child Care Tax Credit

The tax credit supplements the current New York State Child and Dependent Care Tax Credit, and increases the total credit for families earning between $60,000 and $150,000 from $169 to $376 per household, on average.

Life Sciences R&D Tax Credit

A qualified life sciences entity that employs ten or more persons during the taxable year will be entitled to a tax credit of 15 percent of their research and development (“R&D”) expenditures in New York State for the taxable year.

For a qualified life sciences entity that employs less than ten persons during the taxable year, the amount of the credit shall be equal to 20 percent of R&D expenditures in New York State for the taxable year.

Youth Jobs Program Tax Credit & Empire State Apprenticeship Tax Credit Program

Tax credits under these programs will be provided to employers for employing at-risk youth in part-time and full-time positions. There are ten pools (or “Programs”) of tax incentives – each covering a different tax year. Programs one through four cover tax years prior to 2017. Programs five through ten cover tax years 2017 through 2022, respectively. The Commissioner is authorized to allocate up to $50 million of tax credits under Program five and $45 million of tax credits under Programs six through ten.

To participate in the program, a qualified employer must submit an application to the Commissioner within a specified period of time, set forth under the statute specifically for each Program year, and the qualified employee must begin their employment as specified—for each Program year—under the statutes.

Lastly, the Commissioner may adopt regulations as necessary that set forth additional requirements of eligibility to participate in the Program. Such requirements may include the types of industries that the employers are engaged in, and whether the employer offers advancement and employee benefit packages to the qualified individuals.

Determining NY Source Income of a Nonresident Partner of Any Partnership

This provision adds to the determination of New York source income of a nonresident partner of any partnership. If a nonresident is a partner in a partnership where a sale or transfer of the membership interest of the partner is subject to the provisions of Section 1060 of the Internal Revenue Code, then any gain recognized on the sale or transfer for federal income tax purposes shall be treated as New York source income in the year that the assets were sold or transferred.

Closing Sales Tax Loopholes for Transactions between Related Entities

To the definition of retail sales, there shall be added, (A) a sale to a single member limited liability company or a subsidiary for resale to its member or owner, where such single member limited liability company or subsidiary is disregarded as an entity separate from its owner for federal income tax purposes (without reference to any special rules related to the imposition of certain federal taxes), including but not limited to certain employment and excise taxes; (B) a sale to a partnership for resale to one or more of its partners; or (C) a sale to a trustee of a trust for resale to one or more beneficiaries of such trust.

Clarifying the Imposition of Sales Tax on the Sale of Gas or Electric Services

The sales tax rate for the sale of gas or electric services of any nature (including the transportation, transmission or distribution of gas or electricity, but not including gas or electricity) shall be zero percent unless the charge is for transportation, transmission, or distribution – regardless of whether such charges are separately stated in the written contract, if any, or on the bill rendered to such purchaser; and regardless of whether such transportation, transmission, or distribution is provided by such vendor or a third party.

Reduction of Prepaid Sales Tax Rates on Motor Fuel and Diesel Motor Fuel

Under current sales tax laws, every distributor of motor fuel prepays New York sales tax on each gallon of motor fuel that is imported, manufactured or sold in New York State. There are three different prepayment rates (cents per gallon) based on three statutorily defined regions within the State. The rates for each region have been lowered under this bill; one region was lowered from 17.5 cents to 16 cents, one region from 16 cents to 15 cents and the other region from 21 cents to 16 cents.

High Income Charitable Contribution Deduction Limitation Extended

The tax years for which the charitable contribution deduction applies have been extended.

With respect to an individual whose New York adjusted gross income is over $1 million, and no more than $10 million, the New York itemized deduction shall be an amount equal to 50 percent of any charitable contribution deduction allowed under Section 170 of the Internal Revenue Code for taxable years beginning after 2009 and before 2020; this was extended from 2009 – 2018.

With respect to an individual whose New York adjusted gross income is over $10 million dollars, the New York itemized deduction shall be an amount equal to 25 percent of any charitable contribution deduction allowed under Section 170 of the Internal Revenue Code for taxable years beginning after 2009 and ending before 2020; this was extended from 2009 – 2018.

Property Tax Charges on Oil and Gas – Sunset Date Extended

The Act (in the New York laws of 1992) amending the real property tax law relating to oil and gas charges will remain in effect until March 31, 2021. This was extended from March 31, 2018.

Service of Income Execution, Without Filing a Warrant – Sunset Date Extended

The Act (in the New York laws of 2013) amending the tax law relating to serving an income execution with respect to individual tax debtors without filing a warrant shall expire and be deemed repealed on and after April 1, 2020. This was extended from April 1, 2017.

Empire State Film Credits

The Empire State Film Production and Post-Production Tax Credits have been extended for three years through 2022.

Affordable New York Housing Program Benefits

Certain rental unit construction projects within New York City’s “enhanced affordability areas” that meet minimum construction wage requirements shall receive a full property tax abatement for 35 years.

Notable Proposed Budget Exclusions

Two notable budget proposals that did not make the final cut included the expansion of taxable conveyances for New York real estate transfer tax purposes, and the repeal of the C-corporation election for S-corporations.

Firstly, the proposed legislation sought to expand the definition of a taxable conveyance for real estate transfer tax purposes to include: the transfer of an interest in a partnership, LLC, S-corporation or non-publicly traded C-corporation with fewer than 100 shareholders that owns an interest in real property in the state and a fair market value that exceeds 50% of all the assets of the entity on the date of the transfer of an interest in the entity.

Lastly, the FY 2018 Budget Bill would require all federal S-corporations to be treated as S-corporations for New York tax purposes, thereby removing the New York election to be treated as an S-corporation or a C-corporation. These proposals did not make the final budget.

Conclusion

This year’s budget proposal contains a number of extenders and measures focused on compliance. The final budget may, however, be more notable for the original January proposals that were removed from the final budget, as opposed to what remained. Next, State legislatures, including New York’s, will likely be focused on addressing the effects of foreseeable federal tax law changes.

For More Information:

If you have questions about this alert, please contact Steven Bryde, Principal, State and Local Tax Consulting, at 212.503.8806 or sbryde@markspaneth.com; Brian Skornicki, Supervisor, Tax Group, at 212.201.3019 or bskornicki@markspaneth.com; or any of our tax professionals.

About Steven P. Bryde