New York to increase income tax rates; enact SALT workaround
TAX ALERT |
On April 6, 2021, New York Gov. Andrew Cuomo and the state legislature agreed to the fiscal year 2022 budget making a number of changes to the state’s tax code through Senate Bill 2509/Assembly Bill 3009C, including personal and corporate income tax rate increases, an optional pass-through entity tax workaround and numerous other provisions. It is anticipated that the governor will sign the bill. A high-level summary of the legislation is below.
Personal income tax rate increases
Senate Bill 2509 eliminates the highest marginal rate of 8.82% in favor of three new brackets. Beginning with the 2021 tax year, income over $1,077,550 for single filers ($2,155,350 for joint filers and $1,646,450 for heads of households), but not over $5 million will be subject to a rate of 9.65%. Incomes over $5 million, but not over $25 million will be subject to a rate of 10.3%. Incomes over $25 million will be subject to a rate of 10.9%. The three new brackets will again return to the highest rate of 8.82% for tax years beginning after 2027. The previously enacted multi-year phase in of personal income tax rate cuts for the middle class was not impacted by the legislation.
For individuals living in localities with separate income taxes (e.g., New York City with a 3.876% tax on residents), the combined state and local tax rate becomes one of the highest in the country.
Corporate income tax rate changes
As part of its comprehensive tax reform package enacted in 2014, New York reduced corporate income taxes (currently generally 6.5%) and phased out the alternative capital base tax by 2021. The legislation partially reverses those changes. The corporate income tax rate increases to 7.25% for taxpayers with business income over $5 million. The increase is effective for tax years beginning or after Jan. 1, 2021 and before Jan. 1, 2024. The capital base tax has been frozen at 0.1875% and applicable for the same duration as the corporate rate increase.
Optional pass-through entity tax
Senate Bill 2509 allows qualifying partnerships and New York S corporations to elect into an optional pass-through entity tax. Effective for tax years beginning on or after Jan. 1, 2021, electing entities are taxed at the following marginal rates: 6.85% for incomes not over $2 million, 9.65% for incomes over $2 million but not over $5 million, 10.3% for incomes over $5 million, but not over $25 million and 10.9% for incomes over $25 million. Members of the electing entity are permitted a credit against the personal income tax equal to the member’s direct share of the pass-through entity tax. New York also provides a credit for taxes paid for other state tax pass-through entity taxes that are “substantially similar” to New York’s program.
This provision is intended to be a so-called ‘workaround’ to the state and local tax deduction limitation. New York is at least the tenth state to adopt such a provision. The annual election is generally due by the due date of the first estimated payment (March 15 for calendar year taxpayers), but the due date for 2021 is Oct. 15, 2021. The benefits to S corporation shareholders are limited to income derived from New York sources, even for resident shareholders. Additional guidance is anticipated. Taxpayers considering the election should also consider that pass-through entity workarounds may not always be a tax saving strategy.
Miscellaneous credit and incentives provisions
Senate Bill 2509 also extends or makes changes to a number of state credits as follows:
- Decouples from the federal opportunity zone provision allowing for exclusion or deferral of certain gains for both state and New York City purposes effective Jan. 1, 2021
- Extends the empire state film production and post production credits one additional year to 2026
- Extends the farm workforce retention credit three years to include tax years before Jan. 1, 2025
- Extends the alternative fuels credit to Sept. 1, 2026
- Extends the musical and theatrical production tax credit to Jan. 1, 2026 and doubles the amount of available annual credits to $8 million
- Extends the Hire a vet credit to 2023
- Adopts a new restaurant worker credit for employees returning to work
The legislation also explains that certain taxpayers that required some or all of their employees to work remotely as a result of the pandemic may designate that the work was performed at the location the work was performed prior to the state disaster emergency for tax benefits that are based on maintaining a presence within the state or within specific areas of the state. Eligible businesses must certify, that for the entire period the benefit is claimed, the business continued to operate in the state.
What is missing?
There were a number of proposed taxes or increases that received significant press, but ultimately were not included in the tax bill. The proposals included a pied-a-terre tax (a tax on certain properties not qualifying as the taxpayer’s primary residence), a capital gains tax, a billionaire’s market-to-market net worth tax and a stock transfer tax. Many of the proposals are annual discussions that have yet to gain much traction among state legislators or voters.
The tax rate increases come at a time when the state has received a significant allocation of federal funds and a climate where many individuals and businesses are increasingly considering relocation due to an increasingly remote workforce. However, some members of pass-through entities may benefit from the workaround election and a reduction in federal tax liability. Taxpayers subject to the higher rates, or considering electing into a pass-through entity workaround should speak to their tax adviser for both structural planning and modeling of benefits. New York taxpayers should also understand the economic environment is continually changing during the recovery and additional tax changes may be considered. Taxpayers with questions about the tax bill should speak to their New York state and local tax advisers.