Governor Andrew Cuomo recently signed the fiscal 2022 budget (S.2509-C/A.3009-C), making significant changes to a range of taxes, including corporate franchise tax, personal income tax, sales and use taxes, and property taxes. On the personal income tax front, the most notable change is the state’s new income tax rates imposed on the wealthy, which are among the highest in the country, especially when combined with New York City’s tax rates. The New York corporate franchise tax rate was also increased for some taxpayers, along with an extension of the capital tax sunset provisions, which was set to be completely phased out as of tax year 2021.
Also notable, the bill enacts a new elective Pass-Through Entity Tax, joining its neighboring states to provide a workaround to the SALT deduction limitation that was imposed by the 2017 Tax Cuts and Jobs Act.
Corporate Franchise Tax
Corporate franchise tax rates have been increased from 6.5% to 7.25% for corporations with a business income tax base of more than $5 million. For corporations with a business income tax base of $5 million or less, the franchise tax rate will remain at 6.5%. The increased franchise tax rate will be effective for tax years beginning on, or after, January 1, 2021, and before January 1, 2024.
The capital base tax, which was set to completely phase out as of tax year 2021, has been reinstated by the budget bill, at a rate of 0.1875% and will apply to corporations that are not considered small businesses (defined as having net income less than $390,000 and less than 100 employees). Qualified manufacturers, qualified emerging technology companies and cooperative housing corporations will continue to be exempt from the capital base tax. The reinstated capital base tax will be effective for tax years beginning on, or after, January 1, 2021, and before January 1, 2024.
Personal Income Tax
The budget bill will continue to lower personal income tax rates for the state’s middle-class taxpayers. In the fourth year of the lower rate phase-in, the 2021 income tax rates will decrease from 6.09% to 5.97% for taxpayers filing jointly in the $43,000-$161,550 tax bracket; and from 6.41% to 6.33% for taxpayers in the $161,550-$323,200 tax bracket. The phase-in of the reduced rates will be fully completed by 2025.
The state’s high earners did not fare as well. The personal income tax rates, which maxed out at 8.82% prior to this bill, will increase to 9.65% for single filers in the $1,077,550-$5,000,000 bracket and joint filers in the $2,155,350-$5,000,000 bracket.
Even higher tax brackets were created for the state’s highest earners: 10.30% for all individual filers in a $5,000,000-$25,000,000 bracket and 10.9% for all individuals with over $25,000,000 income. These personal income tax rate increases will be effective for the 2021 tax year through 2027. The highest tax rate will revert back to 8.82% after 2027 (or beginning in 2028 tax year).
In addition, the bill provides for a personal income tax credit to New York resident homeowners with income less than $250,000 that pay property tax exceeding 6% of their income. This credit is capped at $350 per year and will apply to taxable years 2021, 2022 and 2023.
Elective Pass-Through Entity (“PTE”) Tax
New York joined neighboring states in enacting an elective pass-through entity tax as a workaround to the $10,000 cap on the SALT deduction imposed by the 2017 Tax Cuts and Jobs Act. The bill provides for an annual irrevocable election available to eligible partnerships, Limited Liability Companies (taxed as partnerships) and S corporations, for tax years beginning on, or after, January 1, 2021.
The election for the 2021 tax year must be made by PTEs by October 15, 2021. For tax years after 2021, the annual election will be due on or before March 15, the due date of the first estimated payment.
The tax rate for the new PTE Tax will range from 6.85% to 10.90%, depending on taxable income. The tax is based only on income attributable to partners subject to personal income tax, but PTEs can still elect to be subject to the PTE tax even if they have partners that are not individuals. Taxable income for PTE tax purposes is defined as:
- “Taxable income for partnerships” is the sum of all items of income, gain, loss or deduction derived from, or connected with, New York sources to the extent they are included in the taxable income of a nonresident and resident partner subject to New York’s personal income tax.
- “Taxable income for S corporations” is the sum of all items of income, gain, loss or deduction derived from, or connected with, New York sources to the extent they would be included in the taxable income of a shareholder subject to New York’s personal income tax.
Partners and shareholders of electing PTEs are allowed to take a credit to offset their personal income tax. The amount of the credit is equal to the partner or shareholder’s direct share of the PTE tax. Credits can be claimed for multiple electing PTEs and are refundable to partners or shareholders.
Similar to PTE tax rules implemented by other states, New York will allow resident credits for other PTE taxes substantially similar to New York’s PTE tax.
Sales and Use Tax
The bill makes a technical correction to the sales threshold related to the sales tax remote vendor provisions, increasing it from $300,000 to $500,000. Remote vendors will be required to register for purposes of collecting sales tax once this higher threshold is met, in the immediately preceding four quarterly periods.
Additionally, the bill extends the sales tax exemption for certain sales or services which are otherwise taxable between financial institutions required under the Dodd-Frank Wall Street Reform and Consumer Protection Act for three years, ending June 30, 2024.
Real Estate Transfer Tax
Provisions related to real estate transfer tax (“RETT”):
- For the first time, “responsible person” provisions have been added to the RETT, requiring these persons to comply with the provisions of the state’s real estate transfer tax. Responsible parties liable for RETT are defined in the bill to include anyone who is an officer, employee, manager, or member of the seller or grantor under a duty to act for a corporation, partnership, LLC, or individual proprietorship. This provision applies to conveyances made on, or after, July 1, 2021, except for conveyances that are made pursuant to binding written contracts entered into on, or before, April 1, 2021, provided that the date of contract execution is confirmed by independent evidence.
- Member disclosure exceptions pertaining to certain RETT returns were amended to also include publicly traded companies, REITs, and mutual funds, so that they are not required to disclose all of their members/shareholders.
Listed below are some other notable provisions that were enacted under the bill:
- Provisions related to Tax Credits:
- Remote work provisions were introduced so that employers that required employees to work remotely due to the COVID-19 pandemic may still designate this work as having been performed in the location where it was performed prior to the declaration of the state disaster emergency in order to preserve tax benefits that are dependent on the taxpayer’s or employees’ presence within the state or particular location. This provision is effective March 7, 2020 and expires on the earlier of the date the state disaster emergency expires, or December 31, 2021.
- Certain credits that were set to expire were extended, such as: Brownfield tax credit, Empire State film production, Empire State post production tax credits, credits and exemptions for alternative fuels, farm employee tax credit, and the musical and theatrical production credit, among others.
- New credits were introduced to help businesses and industries that were hit hard by the COVID-19 pandemic, such as:
- New restaurant credit – eligible businesses can claim a $5,000 credit for each full-time equivalent net employee increase, limited to $50,000 in total tax credits.
- New musical and theatrical production credit – eligible musical and theatrical production companies can claim a credit that is the product of 25% and the sum of qualifying production expenditures paid for during the credit period, not to exceed $3 million per qualifying production for the first year applications are accepted, reduced to $1.5 million if the first performance is in the second year applications are accepted. This credit is available for taxable years beginning on, or after, January 1, 2021 through December 31, 2023.
- Penalties related to wage reporting and withholding reports were increased from $50 per employee to $100 per employee for failure to provide complete and accurate reports. The maximum penalty that can be imposed on an employer was increased from $10,000 to $20,000. These increased penalties will apply to Form NYS-45s that are filed on, or after, June 1, 2021.
Many of the provisions included in the FY 2022 budget are effective in the 2021 tax year. As such, taxpayers must assess the impact to their New York taxes and plan accordingly. Tax rate changes and the PTE tax election could significantly impact estimated payments.
While much of the bill is intended to provide relief to certain taxpayers as we emerge from the pandemic, through tax rate reductions and tax credits, other provisions will shift the tax burden to high net worth individuals and corporations. It remains to be seen how these provisions will affect New York’s economic recovery as the state will see more tax revenue from certain taxpayers, while potentially losing some of these same taxpayers to lower-tax states.
Please contact your Mazars professional for additional information.