On April 13, Governor Andrew Cuomo signed the final version of the FY15-16 New York State (State) budget legislation which he described as the hardest budget negotiation he has dealt with since taking office.1 Taxpayers expecting the legislation to be adopted at the very end of the first quarter for tax provision purposes as it did last year were given an early "April Fool's" as the bills were not presented to the governor until the early hours of the morning on April 1. The budget includes substantial revisions to the New York City (City) tax regime as well as technical clarifications and expansion of the sweeping State tax reform legislation passed last year. The City reforms comprise what City officials described as the largest tax overhaul since the 1940s, although many of the changes simply retroactively conform to the State reforms that went into effect on January 1, 2015. The "revenue-neutral" tax reforms are intended to provide tax relief for local and small business taxpayers while increasing taxes for larger established businesses as well as those located outside the City.
New York State Corporate Income Tax Reform
The FY15-16 budget bill contains a number of technical corrections to the corporate tax changes enacted pursuant to last year's State legislation, most of which go into effect for tax years beginning January 1, 2015. A few of the more significant changes are highlighted below.
Investment Income
Last year's legislation changed the definition of "investment capital."2 Specifically, the legislation introduced a tax exemption for income from "investment capital," which was defined as investments in stock held for more than six consecutive months, but not held for sale to customers. This year's bill further restricts the definition of investment capital to include only stocks that:
- Satisfy the definition of a capital asset under Internal Revenue Code (IRC) Section 1221 at all times the taxpayer owned such stock during the taxable year;
- Are held by the taxpayer for investment for more than one year;
- The disposition of which are, or would be, treated by the taxpayer as generating longterm capital gains or losses under the IRC;
- For stocks acquired on or after January 1, 2015, at any time after the close of the day in which they are acquired, have never been held for sale to customers in the regular course of business; and
- Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer's records as stock held for investment in the same manner as required under IRC Section 1236(A)(1) for the stock of a dealer in securities to be eligible for capital gain treatment (whether or not the taxpayer is a dealer of securities subject to Section 1236), provided, however, that for stock acquired prior to October 1, 2015 that was not subject to Section 1236(A), such identification in the taxpayer's records must occur before October 1, 2015.3
A rule was also added that limits investment income determined without regard to allowable interest deductions to 8 percent of the taxpayer's entire net income.4 For taxpayers that elect to reduce their investment income by the 40 percent election, the 40 percent election is applied after the 8 percent limitation.5
Moreover, the recently adopted legislation does not change the treatment of stock in a unitary corporation, stock in a corporation included in a combined reporting group with the taxpayer, and stock issued by the taxpayer, which continue to be excluded from the definition of investment capital.6
Economic Nexus
An economic nexus standard was enacted last year by the State, which created a franchise tax and metropolitan tax (MTA) surcharge filing requirement for corporations that derive $1 million or more of receipts from any activity in the State using customer-based sourcing.7 A corporation that is part of a combined group and has receipts derived from the State of less than $1 million but more than $10,000 satisfies the threshold requirement for combined reporting if the State receipts of all group members who individually exceed $10,000 equal $1 million or more in the aggregate.
This year's bill clarifies that when aggregating a combined group's receipts for purposes of determining economic nexus, only corporations that are part of a unitary group and satisfy the ownership test of more than 50 percent under N.Y. Tax Law Section 210-C are considered.8 Additionally, the revised nexus provisions will exclude corporations that are not permitted to be included in the State combined filing group for Article 9-A (e.g.., Article 9, Article 33, S corporations, alien corporations without effectively connected income, etc.) from the nexus analysis.9
Sourcing of Marked-to-Market Financial Instruments
Last year's budget created a simplifying convention in which taxpayers were given the option to make an annual and irrevocable election to use a fixed amount of 8 percent of all net income from "qualified financial instruments" in the apportionment numerator in lieu of using customer-based sourcing.10 "Qualified financial instruments" were defined as instruments marked to market under IRC Section 475 or 1256, except for those secured by real property.11 The FY15-16 legislation expands the definition to certain instruments referenced in the sourcing rules applicable to financial transactions provided the taxpayer has marked to market the same financial instruments. Such qualified financial instruments include the following types:
- Loans not secured by real property;
- Federal, state, and municipal debt;
- Asset-backed securities and other government agency debt;
- Corporate bonds;
- Stock or partnership interests that are not investment capital;
- Physical commodities; and
- Other financial instruments.12
If the taxpayer has in the taxable year marked to market a financial instrument of any of the types listed above, any financial instrument of that same type that has not been marked to market by the taxpayer is also a qualified financial instrument for the taxable year.13 In addition to the newly added default sourcing for certain qualified financial instruments when the fixed 8 percent election is not made, the FY15-16 legislation clarifies that only the net marked to market income, gain or loss, is to be included in the apportionment factor.14
Loans secured by real property still do not qualify for the 8 percent qualified financial instrument election.15 The legislation now includes a definition for loans secured by real property and includes loans in which 50 percent or more of the collateral used to secure the loan, at the time the loan was entered into, consists of real property.16
Qualified New York Manufacturers
Effective with tax years beginning on or after January 1, 2014, qualified New York manufacturers are subject to the zero percent business income tax rate.17 "A qualified New York manufacturer" is a manufacturer that meets the New York-located property test (property eligible for the investment tax credit with an adjusted basis of at least $1 million or all real and personal property located in New York) and is principally engaged in manufacturing activities. A taxpayer that does not satisfy the principally engaged in manufacturing test may still qualify as a New York manufacturer, if the taxpayer employs more than 2,500 employees in the State and has adjusted basis of at least $100 million.18
The FY15-16 legislation's technical correction restricts the types of property eligible in the principally engaged in manufacturing test.19 Specifically, eligible property now includes property principally used in in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing.20
Lastly, the FY15-16 legislation clarifies that the qualified manufacturer test is applied at the combined return level, meaning that even if a corporation may qualify on its own, no member of the corporation's combined group can qualify if that corporation is part of a combined group that does not meet the test on a combined basis.21
Net Operating Losses
The computation and application of net operating losses (NOLs) was previously revised for tax years beginning on or after January 1, 2015.22 Prior to 2015, NOLs were applied before apportionment and were carried forward or backward in conjunction with federal NOLs. NOLs are now computed on a post-apportionment basis with a prior net operating loss (PNOL) conversion subtraction available for NOL carryforwards that were generated prior to the effective date of the law change. The FY15-16 bill includes technical corrections that provide new ordering rules for purposes of applying NOL deductions. Taxpayers are now required to first carry an NOL back three years preceding the loss year (with the exception that no loss can be carried back to years beginning before 2015).23 The NOL must be carried back to the earliest of the three preceding years and if not entirely used up, it must be carried back to the second preceding year and then the first preceding year. After the application of the carryback rules, any unused NOL may be carried forward for up to 20 years. Moreover, the legislation adds an election to irrevocably forgo the three-year carryback of NOLs.24 This election is necessary for each year a new NOL is generated, and applies to all members of a combined group.
There were a number of other technical corrections included in this year's budget, including further clarification of "investment income," sourcing rules for special industries, and sales tax provisions.
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Footnotes
1. Ch. 59 (A.B. 3009 / S.B. 2009); Ch. 60 (A.B. 6721 / S.B. 4610), Laws 2015.
2. N.Y. TAX LAW § 208.5(a).
3. Id.
4. N.Y. TAX LAW § 208.6(a).
5. N.Y. TAX LAW § 208.6(b).
6. N.Y. TAX LAW § 208.5(a).
7. N.Y. TAX LAW §§ 209.1(b); 209-B.1(a).
8. N.Y. TAX LAW §§ 209.1(d); 209-B.1(d).
9. N.Y. TAX LAW §§ 209.1(d)(iii); 209-B.1(d)(iii).
10. N.Y. TAX LAW § 210-A.5.
11. N.Y. TAX LAW § 210-A.5(a).
12. Id.
13. Id.
14. N.Y. TAX LAW § 210-A.5(a)(1).
15. N.Y. TAX LAW § 210-A.5(a).
16. N.Y. TAX LAW § 210-A.5(a)(2)(A)(v).
17. N.Y. TAX LAW § 210.1(a)(vi).
18. Id.
19. Id.
20. Id. As amended, the statute specifically references a particular investment tax credit provision. See N.Y. TAX LAW § 210-B.1(b)(i)(A).
21. Id.
22. N.Y. TAX LAW § 210.1(a)(viii), (ix).
23. N.Y. TAX LAW § 210.1(a)(ix)(4).
24. N.Y. TAX LAW § 210.1(a)(ix)(7).
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