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New York proposes to extend increased corporate rates, amend MCTMT, modify PTET
February 2023
In brief
New York Governor Kathy Hochul (D) on February 1 introduced a revenue bill (legislation) as part of the state’s FY 24 executive budget that would:
- Extend an increased corporate franchise tax rate,
- Amend the definition of pass-through entity taxable income for purposes of the New York State and City Pass-Through Entity Taxes (PTET),
- Amend the definition of net earnings from self-employment for Metropolitan Commuter Transportation Mobility Tax (MCTMT) purposes,
- Tie S corporations at the state level to their federal election,
- Allow the Department of Taxation and Finance to appeal decisions from the Tax Appeals Tribunal,
- Make other changes.
In addition, the transportation budget bill proposes to increase the rate of the MCTMT. Both bills will be formally introduced in the Legislature and assigned bill numbers.
The Governor and the Legislature are expected to commence negotiations over the budget, so the final budget may differ from the proposal released on February 1. The deadline for the Legislature to pass the budget is March 31, 2023.
Observation: The executive budget proposes to raise revenues in a number of ways. The increased State corporate tax rates that were enacted in 2021 would be extended for another three years. Employers and individuals operating in the New York City metropolitan area (which includes New York City, and the counties of Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester) also would see a tax increase as a result of the MCTMT rate increase. Limited partners who are involved in managing a limited partnership could become subject to the MCTMT and should consider the tax impact of their involvement in the management of the limited partnership. However, personal income tax rates and New York City corporate tax rates would remain the same.
Observation: S corporations need to consider the implications of the provision binding them at the state level to their federal S corporation election – effectively disallowing such entities to be C corporations for state purposes. Note: New York City (City) does not recognize the federal S election and continues to tax federal S corporations as C corporations under the City’s general corporation tax.
In detail
Corporate tax rates - Part I (subpart A)
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.
FY 24 proposal: Under the current FY 24 proposed budget legislation, the 7.25% rate would be extended for another three years to tax years ending before January 1, 2027. Additionally, the legislation would extend the current 0.1875% capital base tax rate for three years, through tax years ending before January 1, 2027.
Metropolitan Commuter Transportation Mobility Tax (Part B )/(Part Q - Transportation Bill)
Changes impacting limited partners: For purposes of the MCTMT (imposed on employers in the NYC metropolitan area), the legislation would amend the definition of “net earnings from self-employment,” which currently is 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.
The legislation would amend the NY Tax Law to provide that an individual would not be 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 would be disregarded for these purposes. This provision would take immediate effect.
Rate increase - transportation bill: In addition, the proposed transportation budget bill would increase the top rate of the MCTMT, effective on July 1, 2023, to 0.5% from 0.34%. The transportation bill also would increase the rate imposed upon net earnings from self-employment to 0.42% for tax year 2023 and to 0.50% for tax years beginning on or after January 1, 2024.
Observation: It is unusual for tax increases to be considered in measures other than the revenue bill. Interested parties should monitor the MCTMT rate increase to see if it advances as part of the transportation measure or folded into the “regular” revenue bill.
Modifications to the Pass-Through Entity Tax - Part J (subpart C)
The legislation would amend 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 of 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 would apply retroactively to the dates the taxes took effect.
In addition, the legislation, for purposes of the NYC PTET, would amend the definition of “city taxpayer” to include city resident trusts and estates. The Memorandum of 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. The proposed amendment would codify this guidance in the Tax Law.
S corporations (Part CC)
The legislation would require all federal S corporations that are subject to tax in New York to be treated as S corporations for New York tax purposes, starting in 2024, unless the S corporation is a qualified New York manufacturer that elects C corporation status. Currently, federal S corporations have the option of electing S corporation status in New York; if they do not, they generally are treated as C corporations (unless they are deemed to have made a New York S-election under the provisions of Tax Law section 660(i)). This legislation would eliminate that possibility so that all federal S corporations automatically would be treated as New York S corporations.
Observation: This provision was included in previous budget proposals but not enacted.
Other changes
The legislation would also:
- extend the film production credit for an additional five years (through 2034) and increase funding for the credit (Part D)
- authorize NYC to provide a biotechnology tax credit (Part H)
- extend the Empire State commercial production credit for an additional five years (though 2028) (Part I, subpart C)
- extend 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); and
- allow the Department of Taxation and Finance to appeal decisions of the Tax Appeals Tribunal (Part V).
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