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Multistate Tax Alert: New York State 2014-15 Budget Outlines Tax Reform Proposals


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Overview

On January 21, 2014, the Honorable Andrew Cuomo, Governor of New York State, delivered the 2014 -2015 Budget Address. As expected, the Executive Budget includes many of the tax reforms and tax reductions included in the reports of the Governor’s Tax Reform and Fairness Commission and Tax Relief Commission. In this Tax Alert we summarize the various New York State tax reform proposals contained in the Executive Budget.

Corporate tax reforms

The Governor has proposed reducing the corporate franchise tax rate on entire net income from 7.1% to 6.5 percent, to be effective for taxable years beginning on or after January 1, 2016. In addition, the tax on entire net income would be eliminated for upstate manufacturers, to be effective for taxable years beginning on or after January 1, 2014. The Governor’s Executive Budget also includes many of the tax reforms recommended by the Governor’s Tax Reform and Fairness Commission, including merging the Banking Corporation Tax (Article 32) into the Corporate Franchise Tax (Article 9-A), which would be effective for taxable years beginning on or after January 1, 2015. We highlight below certain additional significant corporate tax proposals, which generally would be effective for taxable years beginning on or after January 1, 2015:

  • Adopting an apportionment formula based on a single receipts factor using customer sourcing rules;
  • Adopting full water’s-edge unitary combined reporting with an ownership test of more than 50 percent and providing for a new combined group seven-year election for certain commonly owned groups;
  • Expanding the application of economic nexus in determining whether corporations are subject to tax so that corporations with sales to New York customers of $1 million or more would be subject to tax;
  • Eliminating the additional tax on subsidiary capital and certain existing exclusions for income from subsidiaries while retaining an exemption for dividends from unitary subsidiaries;
  • Redefining what constitutes income from investment capital by limiting exempt investment income to income that New York is prohibited from apportioning as business income under U.S. Constitutional principles and income from stock held for more than six months;
  • Modifying existing expense attribution rules by limiting attribution of expenses to interest expense and by creating a safe harbor whereby taxpayers may elect to reduce total investment income by 40 percent in lieu of subtracting interest deductions directly or indirectly attributable to investment capital or investment income;
  • Using federal tax law effectively connected income concepts (without regard to tax treaties) as the starting point in determining New York entire net income;
  • Requiring that all captive insurance companies be subject to unitary combination;
  • Repealing the "tax treaty" exception to the royalty addback provisions;
  • Repealing the alternative minimum tax, but increasing caps on the alternative taxes based on New York source gross receipts and on allocated business capital; and 
  • Modifying the Metropolitan Transportation Authority ("MTA") Surcharge to provide an economic nexus standard, increase the MTA Surcharge rate to 24.5 percent

The Governor’s budget also provides for the development by the Department of Taxation and Finance (the "Department") of a Compliance Assurance Process similar to that used by the Internal Revenue Service. Under this program, corporate taxpayers would be able to work with the Department’s audit division to resolve issues prior to filing their tax returns.

Tax credits

The Executive Budget includes the following proposed changes to New York’s tax credits:

  • Creating a real property tax credit for qualified New York manufacturers, which would permit a manufacturer to claim a refundable tax credit under either the corporation franchise tax or the personal income tax equal to 20 percent of such manufacturer’s real property tax paid on property used for manufacturing (this would take effect as of January 1, 2014);
  • Reforming the eligibility criteria for the investment tax credit ("ITC") by restricting the credit to qualified New York manufacturers and qualified New York agricultural and mining businesses for property used to produce goods for sale or research and development (this would take effect as of January 1, 2014);1
  • Repealing the financial services ITC, beginning on or after January 1, 2014;
  • Repealing the ITC as applied to qualified film production facilities, industrial waste treatment facilities and air and water pollution control facilities, beginning on or after January 1, 2014;· Extending the Empire State Commercial Production Tax Credit for two years (through taxable years beginning before January 1, 2017);
  • Increasing the aggregate amount of Low Income Housing Tax Credit that the Commissioner of Housing and Community Renewal may allocate from $48 million to $56 million for the New York State 2014-15 fiscal year and from $56 million to $64 million for the New York State 2015-16 fiscal year;
  • Extending the Brownfield Cleanup Program tax credits for another 10 years, with certain new eligibility restrictions placed on the brownfield tangible property credit, among other reforms to that program (this would take effect as of July 1, 2014);
  • Removing the Excelsior Investment Tax Credit component for Article 32 and Article 33 taxpayers, beginning on or after January 1, 2014;
  • Providing a refundable credit for telecommunications excise taxes paid by START-UP New York companies, beginning on or after January 1, 2014; and
  • Expanding the Youth Works Tax Credit to permit such credits to be claimed with respect to employees who work at least 10 hours per week, if those employees are enrolled in high school full-time (and providing an additional tax credit for employers who employ such youths for one additional year), beginning on or after January 1, 2014.

Phase out of the temporary utility assessment (18-A surcharge)

The Governor has proposed immediately eliminating the 2 percent Temporary Utility Assessment levied on electricity, gas, water and steam utility bills for industrial customers. The Governor has also proposed accelerating the phase out of this assessment with respect to non-industrial customers. Currently, the Temporary Utility Assessment is scheduled to be phased out over the next three and half years.

Estate and gift tax reform

The Executive Budget includes a proposal to increase the exemption from New York estate taxation to $5.25 million on an individual’s estate, indexed for inflation. In addition, the top estate tax rate would be reduced from 16 percent to 10 percent. The proposed changes would be phased in over a four-year period. In addition, the Executive Budget includes proposals to require that the value of gifts be added back to an estate (to close a perceived tax loophole in that New York does not have a gift tax). These proposed changes would be effective April 1, 2014. The budget also proposes several changes to the rules regarding personal income taxation of trusts. There would be a "throwback" rule under which distributions, from trusts to beneficiaries who are New York residents, of income not previously subject to New York tax would be added back in computing income subject to the beneficiary’s personal income tax. This change would be effective for income from an exempt resident trust paid to a beneficiary on or after June 1, 2014. Also, trusts would be treated as grantor trusts if they are structured to avoid federal gift tax on contributions of property to the trust (so called "incomplete gift trusts").

Property tax relief

Applicable to taxable years beginning on or after January 1, 2014, the Governor’s proposal includes a two-year property tax freeze delivered to taxpayers in the form of income tax credits. In year one of the freeze, New York will only provide tax rebates to certain homeowners who live in a jurisdiction that stays within the 2 percent property tax cap. In year two, rebates will only be provided to homeowners who live in jurisdictions that stay within the 2 percent property tax cap and that agree to implement a shared services or administrative consolidation plan. The freeze does not apply to New York City.

Other tax simplifications and reforms

The Governor has also proposed a series of actions to simplify the New York tax code, including the following:

  • Repealing the "add-on" minimum tax currently applicable to individual taxpayers;
  • Increasing the personal income tax filing threshold to $4,000 (to align it with the standard deduction);
  • Repealing the corporate organization and license taxes and the maintenance fees;
  • Repealing the tax on agricultural cooperatives;
  • Repealing the stock transfer tax (which currently produces no revenue for New York due to the effective tax rate being set at 0 percent);
  • Aligning the filing of MTA mobility tax and personal income tax returns for self-employed individuals;
  • Repealing the boxing and wrestling exhibitions tax; and
  • Modifying the signature requirement for e-filed returns prepared by tax professionals.

Contacts

If you have questions regarding these proposals or other New York issues, please contact any of the following Deloitte Tax professionals.

Russell Banigan
Director
Deloitte Tax LLP, Jericho
rbanigan@deloitte.com
(516) 918-7283
Mary Jo Brady
Senior Manager
Deloitte Tax LLP, Jericho
mabrady@deloitte.com
(516) 918-7087
Ken Cotty
Partner
Deloitte Tax LLP, New York
kcotty@deloitte.com
(212) 436-3318
Jerry Gattegno
Partner
Deloitte Tax LLP, New York
jgattegno@deloitte.com
(212)436-3360
Theresa Hall
Director
Deloitte Tax LLP, New York
thall@deloitte.com
(212) 436-3218
Ken Jewell
Director
Deloitte Tax LLP, Parsippany
kjewell@deloitte.com
(973) 602-4309
Dan Shirley
Partner
Deloitte Tax LLP, Pittsburgh
dshirley@deloitte.com
(412) 338-7745
Abe Teicher
Partner
Deloitte Tax LLP, New York
ateicher@deloitte.com
(212) 436-3370
Doug Tyler
Director
Deloitte Tax LLP, New York
dtyler@deloitte.com
(212) 436-3703
James Wetzler
Consultant to Deloitte Tax LLP,
New York
jwetzler@deloitte.com
(212) 436-6491
   


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As used in this document, "Deloitte" means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

1 Such property may not have previously been the subject of an ITC or an empire zone ITC allowed to another taxpayer.

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