New York State Budget Changes: Tax Increases, SALT Cap Workaround and Additional COVID ReliefApril 8, 2021
On April 6, 2021, the New York State Legislature and Governor Andrew Cuomo came to an agreement on the state’s operating budget for the fiscal year that began on April 1, 2021. Included in the budget legislation are the following law changes which will affect individuals and businesses in New York.
Tax Rate Increases for New York’s Highest Earners: Until now, New York State’s highest tax rate on individuals was 8.82%. This rate applied to taxable incomes in excess of $1,077,550 for single filers; $1,616,450 for heads of household; or $2,155,350 for those filing jointly. For the 2021 through 2027 calendar years, the 8.82% tax rate has been increased to 9.65%. Two new upper limit tax rates have also been enacted: a 10.3% tax rate is imposed on income in excess of $5 million, and a 10.9% rate is imposed on income in excess of $25 million. These two new upper limit tax rates kick in at the same level of taxable income for all individual taxpayers, regardless of filing status.
New York now has one of the highest marginal state tax rates in the country, behind California at 12.3% and Hawaii at 11%, and just ahead of New Jersey at 10.75%. When coupled with New York City’s tax rate of 3.876%, though, at 14.776% city residents may be paying the highest state and local tax rates in the country. The increased tax rates are presently scheduled to sunset and drop back to 8.82% after 2027.
Increase in Corporate Income Tax Rate: From 2015 through 2020, New York’s corporate income tax rate was set at a flat 6.5%. For tax years beginning on and after January 1, 2021, the rate remains at 6.5% for the first $5 million in taxable income and a new 7.25% tax rate applies to income in excess of that amount. This tax rate increase is scheduled to sunset after 2023.
Extension and Increase in Capital Base Tax: Prior to 2021, New York imposed a “capital base” tax on the business capital of corporations doing business in the state. Corporations pay the higher of the income tax, the capital base tax or the statutory minimum tax. For 2020, the capital tax rate was imposed at a rate of.025% (.00025). This tax rate was scheduled to drop to 0% for years beginning in 2021 and thereafter, but the budget legislation restores the capital base tax at a rate of .1875% (.001875) for 2021 through 2023. Co-operative housing associations, manufacturers and small businesses are exempted from the capital base tax.
New Elective Pass-Through Entity Tax: In an effort to work around the federal SALT deduction limitation, New York will join Connecticut, New Jersey and a growing list of other states enacting laws that impose income taxes directly on passthrough entities (partnerships and S Corporations) doing business within their state borders. Because the tax is imposed directly on the business and not the individual owners, the tax is deductible “above the line” for federal income tax purposes and is not treated as an itemized deduction. Individual investors of the entity also receive a credit against their state income tax liability for some or all of their share of the tax paid by the entity.
New York’s tax will take effect beginning in 2021. Like New Jersey’s tax, it is elective, so a partnership or S Corporation operating in New York is only subject to the tax if it formally elects to be subject to it. This election is made on an annual basis. The tax is imposed at graduated rates of 6.85% through 10.9% on income of a passthrough entity which is subject to tax at the individual partner or shareholder level.
Decoupling from Federal Qualified Opportunity Zone/Fund Benefits: For tax years beginning after December 31, 2017, taxpayers are eligible to defer certain capital gain income from federal taxable income by investing their gains in Qualified Opportunity Funds (QOFs). Such deferred gains remain deferred until the earlier of when the funds are withdrawn from the QOF or December 31, 2026. Gains that remain invested in a QOF for at least seven years are reduced by five percent and gains that remain invested in a QOF for at least five years are reduced by an additional 10%. The budget legislation provides that for tax years beginning on and after January 1, 2021, both individual and corporate taxpayers must add back to their New York taxable income any gains which they elect to defer during the year. Therefore, New York will currently tax gains that are invested in QOFs in years 2021 and thereafter. This “decoupling” from federal law applies to all New York City taxes as well, except, apparently, for Unincorporated Business Tax. If/when the gains are recognized for federal purposes, a corresponding adjustment is made for New York purposes to reduce the taxable gain by the amount which was previously taxed for New York purposes.
Restaurant Return-to-Work Credit Program: The budget legislation funds a $35 million tax credit program aimed at providing much-needed relief to the restaurant industry. Qualified restaurant operators may be eligible to receive a tax credit of up to $5,000 for each new hire made after a certain date selected by the business. The overall amount of credits that any single qualified restaurant entity may receive is capped at $50,000.
New York City Musical and Theatrical Production Tax Credit: The budget legislation funds a $100 million tax credit program that provides musical and theatrical production companies with tax credits of up to $3 million each through March 31, 2023. Marks Paneth’s Theater, Media & Entertainment Group has provided additional information on this new credit program here.
Small Business Recovery Grants: Small businesses (those with less than 100 employees) and for-profit independent arts and cultural organizations operating in New York that have been negatively affected by COVID-19 in a demonstrable way may apply for and receive grants if they were not able to receive sufficient federal assistance via the Paycheck Protection Program or similar relief programs.
Mobile Sports Wagering: Subject to regulatory approval, online and mobile sports wagering will be legalized in New York State.
Marks Paneth will continue to monitor developments and will provide updates as they become available. Contact James M. Brower, Jr., Partner and Leader of Marks Paneth’s State and Local Tax Practice, or your Marks Paneth advisor if you need additional information or assistance.