State & Local Tax Update: New York’s Response to Tax Reform
The 2018 New York State legislative session is well underway. The New York State Assembly’s biggest accomplishment thus far is the March 30 passage of the state’s 2018-19 budget bill (S07509C), which was then signed into law April 12, 2018, by Gov. Cuomo. While this budget bill provides some guidance on New York’s stance relating to the changes made by the Tax Cuts and Jobs Act (TCJA) (Public Law 115-97, 12/22/2017), the assembly’s budget bill ultimately came short in responding to several TCJA issues.
Due to the fact that New York’s law provides for a “rolling conformity” to the Internal Revenue Code (IRC), all but a few changes made under the TCJA will currently affect New York taxpayers.* Therefore, if the New York State Assembly fails to address the other aspects of the TCJA these provisions will automatically be incorporated into the calculation of New York State and New York City taxable income.
The following are provisions of the budget bill that relate to significant aspects of the TCJA which New York has decided to decouple from, along with other provisions of the TCJA that have not been addressed by the New York State Assembly.
Deemed Repatriation Transition Tax
The TCJA provides for a one-time repatriation transition tax on the accumulated earnings and profits of certain foreign corporations under IRC § 965. New York has clarified that the earnings and profits subject to this tax are “exempt CFC income” for New York purposes and therefore will be excluded from New York taxable income. New York taxpayers will also receive relief from the underpayment of estimated taxes that might arise from the interest expense attribution related to the repatriation transition tax.
Foreign Derived Intangible Income
The TCJA created a new deduction under IRC § 250 for 37.5 percent of all foreign derived intangible income (FDII) received by a United States corporation. Section 250 defines foreign derived income broadly to include income from the sales, license, exchange, or other disposition of property to foreign persons, as well as income from services performed for foreign persons. New York has specifically excluded the FDII deduction from the computation of New York taxable income.
State and Local Tax Deduction Cap
One of the most controversial provisions of the TCJA is the $10,000 cap on an individual’s state and local tax (SALT) deductions under IRC § 164(b)(6). New York’s budget includes new provisions designed to work around this limitation. In order to work around this limitation, New York’s budget created a new optional “employer compensation expense program”** and a “charitable gifts trust fund.”
Under the new employer compensation expense program, an employer is permitted to make an annual election to pay a tax on the payroll expense to certain “covered employees” who earn more than $40,000 annually. The tax rate starts at 1.5 percent for 2019 and gradually increases to 5 percent in 2021 and subsequent years. Employees will be eligible to offset a portion of their New York personal income tax liability with a credit for a portion of the employer’s payroll expense tax paid on the covered employees’ wages. This provision effectively shifts the individual’s capped state income tax deduction to a fully deductible payroll tax expense of the employer.
Another avenue created to bypass the SALT limitation is the charitable gifts trust fund. The New York budget bill created a charitable gifts trust fund with two accounts:
- A “health charitable account”; and
- An “elementary and secondary charitable account.”
For tax year 2019 and thereafter, the charitable contribution will allow an individual taxpayer a New York State personal income tax deduction for 85 percent of the contributions made to the two accounts, or other specified accounts.
New York also now authorizes various local school districts, counties, cities, and towns to establish charitable funds. Taxpayers who contribute to these funds are permitted to receive up to a 95 percent credit against their property taxes. This mechanism effectively allows a New York taxpayer to cover a state tax payment to a charitable contribution to avoid the new $10,000 SALT cap.
In a recent notice issued by the IRS, it is clear that there is still much uncertainty and controversy surrounding these newly created work arounds. The IRS has indicated the ultimate deductibility of the contributions is controlled by federal law and not state law, and it will be issuing proposed regulations in response to New York’s and other state’s creative response to tax reform. However, Governor Cuomo has responded with a promise to continue to fight.
Other Proposed Bills
Other bills have been proposed to address the TCJA changes. For instance, Senate Bill S06974 proposes to address the implications created by the TCJA repeal of the uncapped SALT deductions. Specifically, this bill effectively repeals the New York rolling conformity for purposes of personal income taxes and instead sets a static conformity date for references to IRC as of Dec. 1, 2017.
Additionally, Senate Bill S08041 provides that when calculating a corporation’s “entire net income,” the entire net income shall not include the following: (1) the amount disallowed as a deduction pursuant to IRC § 163(j)(1); and (2) any amount deducted by reason of a carry forward of disallowed business interest pursuant to IRC § 163(j)(2).
While the New York State Assembly has addressed some of the key provisions of the TCJA, it still has many other key issues that it may address such as the new foreign dividends received deduction under IRC § 245A and the new global intangible low-taxed income under IRC § 951A. It remains to be seen whether the assembly will address these issues prior to the adjournment of the 2018 legislative session on June 20, 2018.
* Nicole Kaeding & Kyle Pomerleau, Federal Tax Reform: The Impact on States, TAX FOUNDATION, March 8, 2017, https://taxfoundation.org/federal-tax-reform-the-impact-on-states/.
** NY CLS Tax, Art. 24.
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