This is one of several bills being supported by The Business Council to avoid an increase in tax liability for New York businesses resulting from the federal “Tax Cuts and Jobs Act” of 2017. Its intent is to simply maintain elements of the state’s business tax code as they were pre-TCJA. In doing so, this bill is consistent with provisions adopted with bipartisan support as part of the state’s FY 2019 budget.
In general, New York starts with federal taxable income in calculating state business and personal income taxes. Therefore, most changes to the definition of taxable income adopted at the federal level automatically flow-through to state tax law, unless the state “decouples” from them. In the FY 2019 state budget, the legislature approved decoupling measures for both personal and business taxpayers.
Specifically, this legislation decouples from a federal tax law change that limits the deduction of business interest expenses to thirty percent of a taxpayer’s federal adjusted taxable income, effective for the 2018 and future tax years (taxpayers with gross receipts under $25 million are exempt).
Under current New York tax law, this federal cap on business interest deductions would flow through to New York business tax returns, limiting the deduction at the state level.
This cap was adopted by Congress along with “bonus depreciation,” which allows a taxpayer to immediately expense 100% 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 property the cost of which is deducted in the year in which it is placed in service and not depreciated.
However, New York State tax law is already “decoupled” from federal bonus depreciation.
As a result, without this amendment, 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 under the state corporate franchise and insurance tax and the New York City corporation tax. Since Section 163 also provides that, under federal law, any disallowed interest is carried forward and can be deducted in future tax years, this bill also decouples from the federal carryforward provisions to avoid a double-deduction at the state level.
To avoid unintended tax increases caused by federal tax reform, and to avoid a competitive disadvantage for businesses subject to New York’s business taxes, The Business Council strongly supports adoption of S.9030-A (O’Mara).