The Business Council supports this legislation which decouples State tax law from recently adopted federal provisions that will result in unintended increases in State-level tax liability for New York employers.
Under 2017 federal tax reform, the deduction for a business’ net interest expense will be limited to 30 percent of a taxpayer’s federal adjusted taxable income (see IRC section 163(j)), effective for the 2018 and future tax years (taxpayers with gross receipts under $25 million are exempt.)
This cap was adopted by Congress along with “bonus depreciation,” which allows a taxpayer to immediately expense 100 percent of the cost of qualified property in the year the expense was incurred, effective for 2018 through 2023 (and phased down thru 2027). The reason for the federal limit on interest deductions was to prevent a double tax benefit based on expenditures for property whose cost was deducted in the year in which it is placed in service, rather than depreciated over multiple years.
Under current New York tax law, this new federal cap on business interest deductions would “flow through” to businesses subject to the State’s corporate franchise tax (Article 9A), as it is a component of “federal taxable income” which is the starting point for calculating Article 9A “entire net income” tax liability.
However, New York State tax law is already “decoupled” from federal bonus depreciation, and neither the Cuomo administration nor the legislature is proposing to adopt the federal immediate expensing regime.
As a result, without technical amendments, New York taxpayers would be hit with increased tax liability due to the cap on interest deductions, while also being deprived of the State-level benefit of asset expensing.
To address this one-sided outcome, the State should “decouple” from the federal cap on business interest deductions for Article 9A taxpayers. Since IRC Section 163 also provides that disallowed interest is carried forward and can be deducted in future tax years, to avoid a double-deduction, Article 9A amendments should also provide that any amount deducted from federal taxable income pursuant to a carry-forward of disallowed business interest should be added back to Article 9A “entire net income.”
Without this amendment, businesses in New York would be subject to increased annual state tax liability.
For these reasons, The Business Council supports adoption of S.7029 (Benjamin) / A.5961-A (Schimminger).