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New York budget adopts various tax increases, other changes
May 2023
In brief
Update: The legislation was signed by the Governor on May 3, 2023.
The New York Legislature approved FY 24 budget legislation after lengthy negotiations with Governor Kathy Hochul (D), who is expected to sign the legislation. The legislation makes numerous changes that:
- Extend an increased corporate franchise tax rate
- Increase the top rate of the Metropolitan Commuter Transportation Mobility Tax (MCTMT) for New York City employers and self-employed individuals
- Set the rate of the MTA Surcharge
- Amend the definition of net earnings from self-employment for MCTMT purposes
- Amend the definition of pass-through entity taxable income for purposes of the New York State and City Pass-Through Entity Taxes (PTET)
- Allow the Department of Taxation and Finance to appeal certain decisions from the Tax Appeals Tribunal
- Make other changes.
The tax changes are mainly set forth in the revenue bill (A3009/S4009, approved 05/01/23) with some also included in the transportation bill (A3008/S4008, approved 05/02/23).
Observation: This year’s budget bill was a month overdue due to lengthy debate over various nontax issues that are part of the overall budget (e.g., bail reform and affordable housing). It is notable that proposals to impose the sales tax on digital products and impose a fee on delivery transactions did not make it into the final bill. A proposal to bind S corporations for state purposes to their federal S election also did not make it into the final bill.
In detail
Corporate tax rates
Background: Two years ago, the FY 22 budget increased the corporate franchise tax rate to 7.25% from 6.5% for tax years beginning on or after January 1, 2021 and before January 1, 2024, for taxpayers with a business income base greater than $5 million. In addition, the scheduled phase-out of the capital base tax was delayed. The rate of the capital base was to have been 0% starting in 2021. The FY 22 budget imposed the tax at the rate of 0.1875% for tax years beginning on or after January 1, 2021 and before January 1, 2024, with the 0% rate to take effect in 2024. However, the delay did not apply to deemed small businesses.
(Revenue bill, Part I, subpart A): Under the legislation, the 7.25% rate is extended for another three years to tax years ending before January 1, 2027. Additionally, the legislation extends the current 0.1875% capital base tax rate for three years, through tax years ending before January 1, 2027 (with the capital base tax rate decreasing to 0% starting in 2027).
MCTMT/MTA Surcharge/Transportation
MTA Surcharge (Revenue bill, Part GG): The legislation (1) repeals the requirement that the Commissioner of Taxation and Finance annually set the rate of the MTA surcharge; and (2) sets the rate of the surcharge at the current 30% rate for tax years beginning on or after January 1, 2024.
MCTMT rate (Transportation bill, Part Q): The legislation increases the top rate of the MCTMT, effective on July 1, 2023, to 0.60% from 0.34%, for employers engaged in business in New York City. The bill also increases the rate imposed upon net earnings from self-employment for individuals in NYC to 0.47% for tax year 2023 and to 0.60% for tax years beginning on or after January 1, 2024. Rates remain the same for taxpayers who are not engaged in business in New York City but who are otherwise engaged in business in the counties surrounding New York City.
Limited partners - Background: For purposes of the MCTMT (imposed on employers and self-employed individuals in the NYC metropolitan area), the legislation amends the definition of “net earnings from self-employment,” which was tied to IRC Sec. 1402. Under IRC Sec. 1402(a)(13), net earnings generally exclude the distributive share of any item of income or loss of a limited partner.
(Revenue bill, Part B): The legislation amends the NY Tax Law to provide that an individual is not considered a limited partner for MCTMT purposes if such individual takes part (directly or indirectly) in the control, or participates in the management or operations, of the partnership and is not a passive investor. An individual’s title or characterization in a partnership or operating agreement is disregarded for these purposes. This provision takes immediate effect.
Pass-Through Entities/S Corporations
Pass-through entity taxes (Revenue bill, Part J, subpart C): The legislation amends the definition of “pass-through entity taxable income” (for both NYS and NYC PTET purposes) to require electing pass-through entities to include any pass-through entity taxes or similar taxes paid to other jurisdictions that were paid and deducted in the tax year for federal income tax purposes. According to the Memorandum in Support, this change was made to correct an unintentional error in the calculation of both the NYS and NYC pass-through entity taxes that resulted in a “circular calculation.” The amendment applies retroactively to the dates the taxes took effect.
In addition, the legislation, for purposes of the NYC PTET, amends the definition of “city taxpayer” to include city resident trusts and estates. The Memorandum in Support states that this change corrects the unintentional omission of city resident trusts and estates from participating in the NYC PTET where city resident trusts or estates are shareholders of S corporations or members or partners in a partnership.
Observation: The New York State Department of Taxation and Finance posted guidance on its website prior to the September 15, 2022 extended filing date to clarify that in computing its pass-through taxable income, an entity must add back all pass-through entity taxes paid and deducted for federal purposes in the current year, including taxes paid to New York or to other jurisdictions. This change in the budget legislation codifies the guidance in the Tax Law.
Other changes
The legislation (Revenue bill) also:
- Extends the film production credit for an additional five years (through 2034) and increases the amount of the credit and funding for the credit (Part D)
- Amends provisions related to the NYC biotechnology tax credit (Part H)
- Extends the Empire State commercial production credit for an additional five years (though 2028) (Part I, subpart C)
- Extends for three years, until September 1, 2026, tax rate reductions for real estate investment trusts under the New York State real estate transfer tax and the New York City real property transfer tax for conveyances (Part U)
- Expands the scope of the state's False Claims Act to encompass certain tax situations (Part DD)
- Repeals investment tax credit provisions related to transferability of the credit (Part EE)
- Allows the Department of Taxation and Finance to appeal decisions of the Tax Appeals Tribunal. The legislation specifically allows the Commissioner to appeal tribunal decisions, in consultation with the state attorney general, premised on federal or state constitutional law, international law, federal law, laws of other states, or other matters “beyond the purview of the state legislature.” (Part V) Note: This change does not apply to appeals from New York City Tax Appeals Tribunal decisions; the provisions governing such appeals were not amended by the legislation.
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