On April 7, 2021, the New York State Senate and Assembly passed significant tax legislation as part of the 2021 – 2022 New York State budget (Senate bill S2509-C / Assembly bill A3009-C) which was signed into law by Governor Cuomo on April 19, 2021.
The Budget enacts relief provisions for businesses impacted by COVID-19 including a grant program for small businesses that didn’t qualify for other federal COVID benefits, a credit for restaurants that increase employment, and extensions of several existing credit programs. The Budget also includes other tax incentives and benefits including real property tax relief for individuals and childcare incentives for businesses.
Key Provisions Include:
- Increased individual tax rates for high income taxpayers
- Increases to the corporate tax rate
- An optional Pass-Through Entity Tax Credit
- Decoupling from the federal Qualified Opportunity Zone Program
- Real Property Tax Relief
- Covid Relief Credits for Restaurants that Increase Employment
Several items in the proposed budget were cut from the final version including increases in the estate tax rate, a new property tax on high-value 2nd homes in New York City, a sales tax on vacation rental properties, and a requirement that all federal S corporations would be treated as New York S corporations.
Below is a summary of selected significant tax provisions contained in this legislation. If you have questions on how these provisions will affect you or your business please call us.
Key Individual Tax Provisions
Tax Rate Increases for High Income Individuals, Estates and Trusts
The Budget increases personal tax rates on high income taxpayers beginning this year (2021) and continuing through 2027, and creates two new temporary upper tax brackets. Prior to the enactment of the budget, the top tax bracket in New York was 8.82% which was imposed on taxpayers with taxable income over $2,155,350 for married taxpayers, $1,077,550 for single taxpayers, and $1,616,450 for taxpayers filing as head of household. The rate for this bracket will be increased from 8.82% to 9.65%. The first new tax bracket above 9.65% will kick in for taxpayers with taxable income in excess of $5 million, regardless of filing status. The new brackets will be as follows:
In 2028, individual tax rates will revert back to the schedule previously in effect.
- Impact on Estimated Taxes – The budget provides relief to taxpayers whose estimated taxes are too low because they were based on the old tax rates. There will be no underpayment penalty imposed for 1st and 2nd quarter estimated payments that were based on the prior tax rates provided that the taxpayer “catches up” the difference by increasing their 3rd quarter estimated tax payment, due September 15, for the shortfall. Taxpayers whose 2021 estimates are based on 110% of the prior year tax will not need to make any change to their estimates.
Real Property Tax Relief
The budget enacts an income tax credit, effective retroactively beginning with the 2021 tax year, for New York state resident taxpayers whose property taxes on a qualifying New York State primary residence exceed 6 percent of qualified federal adjusted gross income (AGI). The credit will be limited to $350 and will be calculated as a percentage of property taxes in excess of 6 percent of qualified AGI. (QAGI) This percentage will begin at 14% and will begin to phase out for taxpayers with QAGI over $75,000. This credit will be fully phased out for taxpayers with QAGI over $250,000. New York will not issue a credit if the calculated amount is below $250, so the credit amounts will only be between $250 and $350.
Decoupling from Federal Qualified Opportunity Zone Gain Deferral
Effective retroactively for tax years beginning on or after January 1, 2021, for both corporate and individual tax purposes, New York state has decoupled from the capital gain deferral allowed under the Tax Cuts and Jobs Act (TCJA) for federal tax purposes. Any capital gain deferred under this program in 2021 and later years will be added back to calculate New York taxable income and any gains subsequently recognized for federal tax purposes, that weren’t deferred for New York tax purposes, will be excluded from New York taxable income.
Other Individual Tax Changes
- Relief for Underpayment of Withholding on Unemployment Compensation – The tax department may waive interest on underpayment of tax due to insufficient withholding on unemployment compensation in tax year 2020, effective April 19, 2021.
- Interest on Overpayments – Interest will no longer be paid on individual tax refunds less than $5, effective April 19, 2021. (Increased from $1)
Corporate Tax Increases
- Corporate Income Tax – The budget increases the corporate tax rate retroactively for corporations with New York apportioned income greater than $5 million to 7.25 percent, from 6.5 percent, for tax years 2021 through 2023. This will be a “cliff” whereby all income will be subject to the higher rate if the $5 million threshold is exceeded. Small business taxpayers, qualified emerging technology companies, and qualified New York Manufacturers will continue to receive their previous preferential rates.
- Capital Base Tax – The capital base tax, originally scheduled to be phased out from 0.025 percent in 2020 to zero for 2021, is retroactively set at 0.1875 percent for tax years 2021 through 2023 after which it will be eliminated in 2024. Small business taxpayers, cooperative housing corporations, and qualified New York Manufacturers will continue to be exempt from this tax.
Optional Pass-Through Entity Tax
The Budget creates an optional pass-through entity (PTE) tax for partnerships, limited liability companies (LLCs) taxed as partnerships, and S-corporations, as a response to the $10,000 state and local tax (SALT) deduction cap that was enacted in the Tax Cuts & Jobs Act.
Several states enacted pass-through entity taxes after the TCJA was passed. There was uncertainty whether the IRS would challenge these arrangements since many, including the newly enacted New York PTE tax, are optional taxes. In November, 2020, the IRS released Notice 2020-75 indicating that it would allow entity level deductions for this type of tax arrangement. Subsequently, many additional states, including New York, enacted similar tax regimes.
The New York PTE tax, if elected by the entity, creates a tax deduction at the entity level, where it is not subject to the individual SALT limitation, and provides a tax credit to the direct partners, shareholders, or members of the electing entity.
- Annual Election – S-corporations and partnerships, including limited liability companies (LLCs) who are taxed as partnerships, may annually elect to be subject to this tax beginning in taxable year 2021. To opt into this tax, the entity must make an annual irrevocable election by March 15 of the year before the return is due. For 2021 only, the election may be made by October 15, 2021.
- Rates – Entities that opt into this regime will be subject to tax at the entity level on their taxable income at graduated rates ranging from 6.85% to 10.90%. The brackets in 2021 will be as follows:
- Estimated Taxes – Entities subject to this regime will be required to make quarterly estimated tax payments on March 15, June 15, September 15 and December 15 of the calendar year prior to the year in which the return is due. To avoid underpayment penalties, the payments should be the lesser of 90% of the current year tax or 100% of the prior year tax. Fiscal year entities will pay on the same quarterly due dates as calendar year entities.
Estimated taxes are not required for 2021 since it is the initial year of the program. Since the entity is not required to pay estimated taxes for 2021, the partners and shareholders of a pass-through entity that elects into the PTE tax for 2021 must continue to make estimated tax payments as if they weren’t entitled to the credit.
- Taxable Income Subject to PTE tax – The taxable income subject to this tax is calculated differently depending on whether the entity is taxed as a partnership or an S-corporation:
- Partnerships – The taxable income subject to this tax will included all of the entity’s adjusted net income allocated to New York resident individuals and trusts, and the New York source portion of the entity’s adjusted net income allocated to non-resident individuals and trusts. The PTE tax does not apply to income allocated to corporate partners or other partnerships.
- S-Corporations – The taxable income subject to the PTE tax only includes income sourced to New York at the corporate level, regardless of whether the shareholders are New York residents or non-residents.
- Tax Credits – Each partner or shareholder will receive a credit for the partner’s or shareholder’s share of the PTE tax paid by the entity. Credits in excess of the partner’s or shareholder’s actual New York state personal tax liability are refundable or creditable to the following year. An add-back to taxable income in New York in the amount of the credit will be required. Additionally, New York state will allow resident credits for “substantially similar” taxes paid to other states.
- Tax Return – The entity will be required to file a return by March 15 in which an authorized individual will certify that the election was made to be subject to the PTE tax and provide details of the partners or shareholders receiving the PTE credit. Fiscal year entities will file on the March 15 ending after their fiscal year end. The balance of any PTE tax due in excess of the estimated tax payments made will be remitted with the return.
Restaurant Return-to-Work Tax Credit Program
Under this program, qualifying restaurants that were impacted by COVID and have increased hiring are eligible for a tax credit of up to $5,000 per new worker hired, up to $50,000 per business effective for the 2021 tax year.
- Eligibility Requirements – The applicant must be an independently owned food service establishment in New York state that qualifies as a small business, has experienced economic harm as a result of Covid, has hired at least one full-time equivalent worker equivalent for the restaurant since the 1st quarter of 2021, and is either:
- located in New York City and was subject to a ban on indoor dining for at least 6 months, or
- located outside New York City and was in a zone designated by the NYS Department of Health as a Red Zone or Orange Zone for at least 30 consecutive days.
- Economic Harm – To show the restaurant was economically harmed by COVID, the restaurant must show a decrease of at least 40 percent in either gross receipts or average full-time employment in either the 2nd or 3rd quarter of 2020 as compared to gross receipts or average full-time employment in the same quarter of 2019.
- Net Employee Increase – The business must have increased average full-time equivalent (FTE) employment for the period beginning 4/1/21 through either 8/31/21 or 12/31/21, as elected by the business, as compared to the FTE employment in the first calendar quarter of 2021. Full-time equivalent was not defined, but other incentives define this as 35 hours per week.
- Small Business – The business must have fewer than 100 full-time equivalent employees, must be independently owned and operated, and not dominant in its field.
- Amount of Credit – A refundable credit of $5,000 per each full-time equivalent employee increase is allowed up to a maximum of $50,000.
- Application – Restaurants must apply in advance and will be allocated a set amount of credit available. (The program is capped at $35 million total credits eligible to be allocated statewide.) The application process has not yet been announced.
- Claiming the Credit – After demonstrating that the requirements have been met, the business will receive a Certificate of Tax Credit which must be attached to its annual income tax return. Applicants who elect to use the August 31 end date for the FTE calculation will be able to claim an advance on the credit if they receive their Certificate of Tax Credit by November 15.
COVID-19 Pandemic Small Business Recovery Grant Program
A grant program is created for small businesses, micro-businesses, and for-profit independent arts and cultural organizations that are resident in New York state, have suffered economic hardship due to COVID-19, and do not qualify for business assistance grant programs under the American Rescue Plan Act of 2021 or any other available federal COVID-19 economic recovery or business assistance grant programs, including loans forgiven under the Paycheck Protection Program (PPP), or are unable to obtain sufficient business assistance from these programs.
The Empire State Development Department has determined that grant amounts will be based on the 2019 or 2020 gross receipts of the business as follows:
- Small Business – A small business, for purposes of this program, is one that is resident in New York state, is independently owned and operated, is not dominant in its field, and employees 100 or fewer persons. Micro-businesses are those meeting the above requirements but with 10 or fewer employees. The business must have been in operation by March 1, 2019, must still be viable as of the date of the application, and must have generated a profit of at least $1 on its 2019 corporate Form 1120 or S corporation Form 1120S, partnership Form 1065, or individual tax return schedule C or F. Businesses that received grants under the SBA Restaurant Revitalization Grant program, landlords, and passive real estate businesses are not eligible.
- 25% Decline in Gross Receipts – Eligible businesses must be able to show a 25% or greater decline in gross receipts in 2020, as compared to the 2019 tax year based on the federal tax returns filed by the business.
- Expenses – The grant must be used for COVID-19 related costs or expenses incurred between March 1, 2020 and April 1, 2021 including payroll costs, rent or mortgage payments, property taxes, insurance costs, utility costs, HVAC costs incurred due to COVID, purchases of personal protective equipment (PPE) for the business, supplies and materials necessary for compliance with COVID-19, and other machinery and equipment costs incurred due to COVID.
- Application – Applicants will apply with the New York state Economic Development Department and will be required to provide copies of both their 2019 and 2020 business tax returns. Information on applying is available at nysmallbusinessrecovery.com. The program is limited to $800 million in total grants and priority will be given to certain socially and economically disadvantaged business owners. The program began accepting applications in June.
- Tax Impact – These grants should be treated as taxable income for federal tax purposes. The grants will not be taxable for New York state tax purposes.
Please contact us with questions regarding how these new laws will impact your taxes.