INSIGHTS AND RESOURCES
New York to increase income tax rates; enact SALT workaround
TAX ALERT |
Authored by RSM US LLP
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.
Call us at +1 213.873.1700, email us at firstname.lastname@example.org or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Harlan Kwiatek, Rob Calafell, Robert Zonenshein, Patrick Doyle and originally appeared on 2021-04-14.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.