Authored by Seth Rabe and Donna Scaffidi
On April 19, 2021, Governor Cuomo signed the New York State Fiscal Year 2021-22 Budget Bill increasing business and individual tax rates, extending the business capital base tax and enacting the pass-through entity tax, among other changes.
Currently, the highest state income tax rate is 8.82%. The legislation increases the rate to 9.65% on income between $2,155,350 and $5 million for married individuals filing jointly, between $1,616,450 and $5 million for resident heads of household and between $1,077,550 and $5 million for unmarried individuals, married individuals filing separately, estates and trusts.
For individuals with income between $5 million and $25 million, the tax rate will be 10.3% and 10.9% for income over $25 million. These rates apply to all classes of taxpayers. The legislation also updates the state’s tax table benefit recapture provisions to correspond with the new increased rates.
The above-mentioned rates became effective for tax years beginning on or after Jan. 1, 2021 and will be in effect through 2027. As a result, a New York City resident with more than $25 million of taxable income will be subject to the country’s highest combined rate of 14.776%.
At the time of this writing, the New York State Department of Taxation and Finance has not released any guidance as to whether it will abate underpayment penalties.
The corporate income tax rate increased from 6.5% to 7.25% for tax years beginning on or after Jan. 1, 2021 and before Jan. 1, 2024. The corporate rate increase only impacts Article 9-A taxpayers, which include general C corporations, S corporations and financial institutions with a business income base greater than $5 million.
Originally scheduled to phase out completely in 2021, the business capital base tax for Article 9-A taxpayers will be extended for three years, except for cooperative housing corporations, qualified New York manufacturers and small businesses. The rate is 0.1875% for tax years beginning on or after Jan. 1, 2021 and ending before Jan. 1, 2024.
Cooperative housing corporations and qualified New York manufacturers and small businesses (defined in NYS Tax Law Section 210.1(f)), is 0% beginning on Jan. 1, 2021. For the remainder of Article 9-A entities, the business capital base tax will now phase out starting Jan. 1, 2024.
For tax years beginning on or after Jan. 1, 2021, partnerships and S corporations can make an annual election to pay a pass-through entity tax. The rates are as follows: if pass-through entity income is $2 million or less, the rate is 6.85%; $2 million to under $5 million, $137,000 plus 9.65% of income over $2 million; $5 million to under $25 million, $426,500 plus 10.3% of income over $5 million; over $25 million, $2,486,500 plus 10.9% over $25 million.
The election must be made annually, and once made, is irrevocable for that tax year. Additionally, the election is required to be made by March 15th in the same tax year for which it applies. For 2022 taxable year, the due date is March 15, 2022 for a calendar year taxpayer. For calendar year 2021, the election is due Oct. 15, 2021. An electing partnership or electing S corporation are not required to make estimated tax payments for taxable year 2021. However, for taxable year 2021, individuals, estates or trust partners, members or shareholders of electing entities are required to make estimated tax payments.
Individual, trust or estate partners and shareholders will be able to take a credit equal to 100% of the tax paid on their behalf by the pass-through entity. A taxpayer may not claim a credit unless the electing partnership or S corporation paid the tax and the pass-through entity supplies sufficient information on its tax return to identify the taxpayer, which includes the social security number or taxpayer identification number of Article 22 taxpayer who will claim the credit.
Importantly, the budget legislation also provides that residents will receive a credit against their New York State tax for all other “substantially similar” state pass-through entity taxes. It is not clear what “substantially similar” means and whether this will cover taxes paid by a pass-through entity in a state that only requires members to reduce their taxable income by the distributive share of income they received from the pass-through, or whether it will only apply to states similar to New York’s regime that provide a credit in lieu of an income reduction.
Both New York State and New York City decouple from federal opportunity zone benefits under IRC Section 1400Z-2. The decoupling requires addition and subtraction modifications to a taxpayer's tax base and applies to tax years beginning on or after Jan. 1, 2021.
Businesses receiving New York State tax credits are often required to maintain a certain number of employees in the state. This obviously became difficult or impossible during the pandemic. The New York State Commissioner of Taxation and Finance is authorized to waive the requirement to have these employees physically in the state, provided the business receiving the tax credit demonstrates that the requirements would have been met if not for the COVID-19 state of emergency declared by the Governor Cuomo. This provision is retroactive to March 7, 2020 and terminates on the earlier of the expiration date of the state disaster emergency under executive order 202 of 2020, or Dec. 31, 2021.
Any officer, employee, manager or member under a duty to act for a corporation, partnership, LLC or individual proprietorship is responsible for complying with the provisions of the New York State’s real estate transfer tax. This applies to conveyances made on or after July 1, 2021, unless the conveyance was made pursuant to a binding written contract entered on or before April 1, 2021.
Should you have questions regarding this matter, please contact a member of the Baker Tilly state and local tax team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.