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The Business Council is strongly opposed to provisions in the Executive Budget, which were also included in both the Senate and Assembly one-house budget bills, that would adopt permanent adverse – and perhaps unintended – financial burdens on many of the state’s most innovative businesses. If any federal “decoupling” language is included in the final budget agreement, it is essential that Parts F and G be amended to avoid significant cost impact on innovation-based businesses.
If Parts F and G were adopted as proposed, they would permanently impose unique, significant tax burdens on a wide range of businesses that do extensive research and development work, including those in the manufacturing, engineering, pharmaceutical and finance sectors, among others. Importantly, this outcome would not be the result of explicit state tax policy decisions. Rather, it is the product of ill-advised federal tax legislation that was never intended to be implemented. If adopted, these provisions would make New York a more expensive state to do research and development work and place us at a competitive disadvantage relative to many other states who are taking a different approach.
“Research and experimental” expenditures (defined in IRS regulations as generally includes all such costs incident to the development or improvement of a product) had long received separate treatment under federal and state tax law because of their unique nature, i.e., they do not represent, and may never actually result in the creation of, a capital asset that would be subject to multi-year depreciation. Congress clarified tax treatment of these unique expenditures in 1954, when it allowed taxpayers to elect either first-year expensing or amortization of such expenditures. This approach was also applied in New York State.
In 2017, the federal Tax Cuts and Jobs Act reversed the long-standing election to expense R&E expenditures and instead, required capitalization of all R&E expenditures, and required their amortization over five years for domestic R&E expenditures and fifteen years for such foreign expenditures. However, the TCJA delayed this mandate’s effective date until December 31, 2021 – with widespread expectation that Congress would restore expensing prior to that date, and the amortization mandate would never take effect. Again, as a rolling conformity state, New York followed this same path. Unfortunately, due to Federal inaction, innovation businesses were subject to this adverse, discriminatory tax treatment from 2022 until adoption of H.R.1 in 2025, which – in new IRC §174A -- allowed for the expensing of all domestic R&E expenditures.
Now, Article VII revenue bill provisions would decouple both state (Part F) and New York City (Part G) taxes from the expensing provisions of newly adopted IRC §174A
Specifically, Part F of the Article VII bill – applicable to the state’s corporate franchise, personal income and insurance taxes – would require taxpayers, in calculating state taxable income, to treat R&E expenditures as if the provisions of IRC §174A(c) applied, thereby requiring such expenditures to be charged to the taxpayer’s capital account, with Part F also specifying a 60-month amortization period. By locking taxpayers into provisions of paragraph (c) of IRC §174A, Part F would further impact taxpayers by delaying the beginning of deductions until “the month in which the taxpayer first realizes benefits from such expenditures.” Part G, applicable to NYC taxes, contains similar but not identical provisions.
We believe the Administration’s intent was to decouple from new federal expensing provisions for investments in capital assets, such as those in the newly adopted IRC §168(n) for “qualified production property,” as well as from the retroactive provisions of new IRC §174A (allowing for the deduction of some R&E expenses that occurred after December 31, 2021.) However, most of the R&E expenditures subject to proposed Parts F and G are non-capital related, but instead are operating expenses such as salary, benefits and operating expenses – expenditures that would be deductible business expenses in all other business settings, unless those costs were directly related to the creation of a capital asset.
While we question the overall policy decision to decouple from pro-investment Federal tax reforms, we strongly oppose the provisions of Part F and G that would impose permanent 5-year amortization on all categories or R&E expenditures. Such an approach would be counter to the state’s overall economic development policies.
Even if the legislature ultimately decides to disallow expensing of investments in capital investments used for R&E purposes, it is essential that Part F and G provisions be amended to allow regular deductions of non-capital R&E expenditures, an approach that would largely restore long-standing state and NYC tax treatment of such expenditures.
Moreover, since all decouple provisions of proposed Part F and G would be applicable to the 2025 tax year, taxpayers must be protected from any interest or penalties related to underpayment of estimated or final tax payments that were based on H.R.1 provisions in effect and reflected in state and NYC tax laws through the adoption of the FY2027 state budget.
As always, we welcome the opportunity to discuss our concerns and recommendations