Governor Cuomo Signs New York Budget

On April 19, New York Governor Andrew Cuomo signed the state’s 2021/22 budget (S2509C) into law. Some of its key provisions include increasing the tax rates for higher wage earners, creating a new pass-through entity tax, increasing the corporate franchise tax rate for taxpayers with a taxable income above a certain threshold, and reinstating the capital base tax, among other items. A summary of the bill is as follows.

Increase in Personal Income Tax Rates for High-Wage Earners

Effective January 1, 2021, the budget bill creates three new tax brackets for high income earners:

Married filing jointly
Over $2,155,350, but not over $5,000,000: 9.65%
Over $5,000,000, but not over $25,000,000: 10.30%
Over $25,000,000: 10.90%

Head of household
Over $1,616,450, but not over $5,000,000: 9.65%
Over $5,000,000, but not over $25,000,000: 10.30%
Over $25,000,000: 10.90%

Unmarried, married filing separate and trusts and estates
Over $1,077,550, but not over $5,000,000: 9.65%
Over $5,000,000, but not over $25,000,000: 10.30%
Over $25,000,000: 10.90%

The increased tax rates are applicable through 2027. When considering the highest New York City individual income tax rate of 3.876%, the combined New York State and New York City rate for a New York City resident that is a high income earner is the highest individual income tax rate in the country (14.776% compared to California’s 13.3%).

New York State Pass-Through Entity (“PTE”) Tax

The New York State PTE tax (Article 24-A) allows for a credit of 100% of the distributive share of the PTE taxes paid by an eligible partnership or S corporation on behalf of the individual partner, member or shareholder. An eligible partnership is any partnership (other than publicly traded partnerships) with a New York State resident partner or income from New York sources that has a NY State filing requirement. An eligible partnership includes a limited liability company and any entity that is treated as a partnership for federal income tax purposes. An eligible S corporation is a corporation treated as an S corporation for federal income tax purposes with a valid New York State S election in effect.

An eligible partnership or S corporation elects to pay the PTE tax must make an annual election by the due date of the first required estimate for the taxable year (March 15 for a calendar-year taxpayer). This annual election is irrevocable. For an S corporation, an election can be made by any officer, manager or shareholder who is authorized to make the election on behalf of the shareholders. If the entity is not an S corporation, any member, partner, owner or other individual with authority to bind the entity or sign returns can make the election. The effective date for the PTE tax is January 1, 2021. For the 2021 tax year only, estimated payments are not required, and the non-revocable election must be made by October 15, 2021.  As a result, for 2021 individuals should continue to make their estimated payments regardless of whether or not a PTE election will be made.

The PTE tax is imposed on all income, gain, loss or deduction derived from or connected with New York sources to the extent included in taxable income of a nonresident partner subject to tax; and all items of income, gain, loss or deduction to the extent they are included in the taxable income of a resident partner subject to tax. The New York PTE tax uses graduated tax rates ranging from 6.85% to 10.9% based on the amount of the PTE’s taxable income for the year.

Estimates must be paid quarterly, 25% each quarter. Estimates are due on the 15th day of March, June, September and December. The budget bill does not include any guidance on what effect the paying of the PTE tax has on nonresident withholding and the filing of composite returns.

New York State allows a resident to obtain a credit for taxes paid to other states for any income tax imposed on such individual by another state, political subdivision of such state, the District of Columbia or a province of Canada. New York State residents are allowed a credit for any PTE tax paid to another state, political subdivision of such state, and the District of Columbia that is substantially similar to the New York State PTE tax. The credit for taxes paid cannot reduce the tax to an amount less than would have been due if the income subject to taxation by the other state was excluded from the taxpayer’s New York income. Eligible S corporations must be treated as a New York S corporation.

The provisions for the New York State PTE tax will be incorporated into New York Tax Law Sections 860-866 and can be found in Part C of the budget bill. 

Franchise Tax and Other Changes

• The New York State franchise tax rate has increased from 6.50% to 7.25% for taxpayers with a business income tax base of more than $5 million, effective for tax years beginning on or after January 1, 2021, and before January 1, 2024 (Part HHH).
• New York State has reinstated the capital base tax for the years 2021-24. (It was set to expire in 2021.) Qualified New York manufacturers and small business taxpayers will have a 0% rate (Part HHH).
• Effective January 1, 2021, any capital gain excluded from federal gross income (as a deferral) for the taxable year pursuant to an investment made in a Qualified Opportunity Zone must be added back to net income for purposes of the New York State corporate franchise tax, New York State and New York City personal income tax, New York City business corporate tax, New York City general corporate tax, and the franchise tax imposed on insurance companies (Part DDD).
• New York State will now impose a penalty for failure to complete and correct employee withholding reconciliation information. The penalty is $100 times the number of employees for which the information is incomplete or incorrect. The maximum penalty is $20,000 for each quarter. This provision applies to returns filed after June 1, 2021 (Part G).
• The budget bill extended the Empire State Film Production Credit and Post-Production Credit for one additional year, until January 1, 2027 (Part F).
• The budget bill extended the sunset date for the musical and theatrical production tax credit for four additional years (to January 1, 2026) and increased the annual tax credit cap from $4 million to $8 million (Part HH).
• Due to COVID-19, for the duration of the state disaster emergency declaration, employees that were required to work remotely may be designated as working at the location where the work was performed before the declared state disaster for tax benefits associated with the Excelsior Jobs Program and the START-UP NY Program (Part NN).
• Effective immediately, the budget bill created a new restaurant credit where eligible businesses can claim a $5,000 credit for each full-time equivalent net employee increase, limited to a total credit of $50,000 (Subpart A).
• The budget bill also added a new provision to the Credit for Rehabilitation of Historic Properties to allow for 150% of the allowable credit with respect to restoration of a certified historic structure that is a small project (qualified rehabilitation expenditures totaling $2.5 million or less). The amount of this credit is 30% of the federal credit, up to $100,000. This provision is effective January 1, 2022 (Part CCC).

Personal Income Tax Unemployment Compensation

Separate from the budget, the Department of Taxation and Finance has issued a bulletin explaining the state's treatment of the federal American Rescue Plan Act of 2021's $10,200 unemployment compensation exclusion. New York decoupled its personal income tax laws from any changes to the Internal Revenue Code as of March 1, 2020, and therefore does not permit this exclusion. Affected taxpayers must use the updated IT-558 Form, New York State Adjustments due to Decoupling from the IRC, to add back the excluded unemployment compensation for New York income tax purposes. Affected taxpayers who have already filed their 2020 personal income tax returns and did not add back the excluded income must file an amended New York State tax return. (New York State Tax Treatment of Unemployment Compensation, N.Y. Dept. of Taxation and Finance, April 8, 2021.)

Read the full bill here.