United States

New York City announces plan to adopt New York state tax reform

TAX ALERT  | 

On Jan. 12, 2015, New York City Mayor Bill de Blasio proposed major tax reforms for New York City. His plan, detailed in a New York City press release, is to modify the city’s corporate tax laws to conform to New York Gov. Andrew Cuomo’s tax reforms passed on March 31, 2014. 

The press release marks the first step by the mayor to conform with state changes, the majority of which took effect on Jan. 1, 2015. Without this conformity, New York state and New York City corporate taxes would have numerous differences that could create tax provision accounting and tax compliance nightmares.  For example, the use of market-based sourcing by the state and a cost-of-performance-based sourcing system by the city.  Additionally, the state requires unitary combined reporting, while the city allows combined reporting only in the event of actual distortion or substantial incorporate transactions.

New York City’s proposed changes must be adopted by the state legislature. The NYC changes are likely to be incorporated into Gov. Cuomo’s upcoming executive budget. If adopted, they are to take effect retroactively to Jan. 1, 2015.

Until now, communications from city officials regarding the adoption of Gov. Cuomo’s tax reforms indicated that the reforms would only be followed if they could be adopted in a revenue-neutral fashion. In an attempt to achieve revenue neutrality, Mayor de Blasio’s proposals do not line up completely with last year’s New York state tax reforms.

For example, the city is not going to phase out the capital tax base. Mayor de Blasio’s proposal calls for an increase in the cap to $10 million from $1 million. It also retains the alternative tax base on capital and the unincorporated business tax. Further, the mayor’s proposal targets small businesses and manufacturers for relief by:

  • Excluding the first $10,000 of capital tax base
  • Reducing the tax rate for small non-manufacturers with less than $1 million in allocated net income to 6.5 percent (from 8.85 percent)
  • Reducing the tax rate for small manufacturers with less than $10 million in allocated net income to 4.45 percent (from 8.85 percent)

These proposed New York City tax reforms will not be effective until approved by the New York state legislature; however, near-term approval is highly likely. Accordingly, taxpayers should take these proposed reforms into consideration when planning and budgeting for business activities within the city for 2015 and beyond and should prepare to account for the impact of these changes on cash taxes and deferred tax assets and liabilities for financial statement purposes.

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