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NY State Budget Unleashes Aggressive Tax Hikes

Wayne Berkowitz and Ken Maeng

4.12.21 | Client Alert

As of April 6, 2021, the Governor of New York State, Andrew Cuomo, and the State Assembly and Senate have agreed on a budget for Fiscal Year 2021-2022. The budgets, contained in Assembly Bill A3009C and the Senate Bill 2509C, appear to be identical. We expect this budget to be enacted into law very soon and have summarized the key tax provisions as follows:

Personal Income Tax Rate Hikes

The bill creates three new incremental tax brackets: 9.65%, 10.30% and 10.90%. The new rates are effective retroactively to January 1, 2021 and will expire after 2027. Details for each bracket include:

  • The 9.65% rate applies to New York taxable income in excess of $1,077,550 for single filers and $2,155,350 for joint filers.
  • The 10.30 % rate applies to New York taxable income in excess of $5,000,000 for single filers and joint filers.
  • The 10.90% rate applies to New York taxable income in excess of $25,000,000 for single filers and joint filers.

By way of comparison, the highest tax bracket in 2020 was 8.82%. As such, the bill will result in some New York City residents now having the dubious honor of being subjected to the nation’s highest tax rates. The highest New York State rate of 10.9% when coupled with the New York City rate of 3.876% results in a combined personal income tax rate of 14.776%. At these income levels, existing New York law also phases out all itemized deductions except 25% of charitable contributions.

For tax years starting on January 1, 2028, a rate of 8.82% will apply to New York taxable income in excess of $1,077,550 for single filers and $2,155,350 for joint filers.

Corporate Tax Hikes

For corporate taxpayers with a business income base of more than $5 million, the current corporate tax rate of 6.5% temporarily increases to 7.25% effective for tax years beginning on or after January 1, 2021 and before January 1, 2024.

The tax on business capital, previously scheduled to be eliminated for tax years beginning on or after January 1, 2021 has been reinstated temporarily at a rate of 0.1875%. The tax is again scheduled to be eliminated for tax years beginning on or after January 1, 2024. Corporations meeting the definition of a small business or a manufacturer will not be subject to the tax for 2021 and beyond.

Optional Pass-Through Entity (“PTE”) Tax 

Beginning on January 1, 2021, New York allows eligible PTEs (i.e., Subchapter S corporations and entities taxed as partnerships) to elect to be taxed at the entity level rather than the shareholder or partner level. The PTE tax is designed to be a work around for the federal state and local tax deduction cap of $10,000 (the “SALT CAP”). Electing PTEs are taxed at the rate of 6.85% to 10.90%, depending on their PTE taxable income.1 In the case of an electing partnership, pass-through entity taxable income includes New York source income of a nonresident partner plus all income of a resident partner. In the case of an electing S corporation, taxable income includes income derived from or connected with New York sources.

Note: The PTE tax election is made annually by the due date of the first estimated payment (i.e. March 15th) and is irrevocable for the year elected.

If the PTE tax election is made, individual owners of the PTE will receive a corresponding New York State refundable income tax credit equal to the owner’s direct share of the PTE tax. The legislation also allows residents of New York to take a credit against their personal income tax for PTE tax paid to other states, provided that the PTE tax is substantially similar to the New York PTE. Taxpayers may also qualify for a resident tax credit for PTE taxes paid to Canadian Provinces (this credit may be limited based upon the taxpayer’s claiming a federal foreign tax credit).

Real Estate Transfer Tax

The New York State Real Estate Transfer Tax is amended to require payment by the grantor. Nevertheless, the grantee is jointly and severally liable if the grantor fails to pay the tax. The amended law provides the grantee with a cause of action against the grantor for failure to pay the tax. The law allows the grantee to assume responsibility for payment of the tax through contract with the grantor.

The tax is also amended to expand the definition of “person” to incorporate a responsible party standard, thereby imposing individual liability (similar to the sales tax), for tax not paid by the grantor or the grantee.

These new provisions apply to conveyances made on or after July 1, 2021. However, conveyances made pursuant to a binding contract entered into on or before April 1, 2021 will not be impacted by the amendments.

Suspension of Qualified Opportunity Fund Benefit

Under federal tax law, a taxpayer may elect to defer capital gain from the sale or exchange of property with an unrelated person by investing all or part of its eligible gains in a Qualified Opportunity Fund (QOF) generally within 180 days after the sale or exchange. Moreover, if the QOF investment is held for more than 10 years any gain on further appreciation is exempt from taxation. New York State followed this treatment prior to the new budget’s enactment.

Effective for tax years beginning on or after January 1, 2021, New York will no longer recognize federal QOF treatment. Consequently, for individuals, corporations, and taxpayers subject to the insurance premiums tax the initial gain and any further gain relating to appreciation of an investment in a QOF will be subject to New York State and New York City tax (if applicable). The amended law does not impact the deferral of initial gain nor the exclusion of gain on further appreciation on investments in QOFs made prior to January 1, 2021. It appears that QOF investments made in 2021 within 180 days of an eligible gain that occurred in 2020 will be grandfathered as well. In any year when gain is recognized for federal income tax purposes on the investment in the QOF, New York Law excludes the gain that was previously included in New York taxable income (i.e. federally deferred gain that is included in New York Taxable income in tax years on or after January 1, 2021). Notably absent from the legislation is any reference to the New York City Unincorporated Business tax (NYC UBT). Therefore, the NYC UBT should continue to recognize the federal treatment of investments in QOFs.

Selected Miscellaneous Provisions

The bill also:

  • Extends the empire state film production credit and the empire state film post-production credit to expire after 2026.
  • Enacts a new musical and theatrical production credit for New York City.
  • Creates a sales and use tax exemption for breast pump replacement parts and breast pump collection and storage supplies for home use.

Noteworthy Omissions

The following previously proposed items were not included in the new law.

  • A 1% tax on capital gains.
  • A recording tax on mezzanine debt and preferred equity investments.
  • A pied-a-terre tax on certain non-primary residences in New York City.
  • Increases to the New York Estate Tax.

Questions: Contact Wayne Berkowitz at 212.331.7465 | wberkowitz@berdon.com or reach out to your Berdon advisor.

1 6.85% applies to taxable income below $2,000,000; 9.65% applies to taxable income of $2,000,000 but less than $5,000,000; 10.30% applies to taxable income of $5,000,000 but less than $25,000,000; and 10.90% applies to taxable income exceeding $25,000,000.