The Business Council supports this legislation, which would avoid an increase in tax liability for New York business and individual taxpayers 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 terms, the starting point for calculating New York’s personal income tax (PIT) under Article 22 is a taxpayer’s adjusted gross income (AGI). The federal Tax Cut and Jobs Act (TCJA) made numerous changes that expanded the Internal Revenue Code’s (IRC) definition of income, and/or limited deductions and credits. Subsequently, the state’s Executive Budget proposed, and the legislature approved, several measures to “decouple” from TCJA provisions in order to avoid significant state-level tax increase on for New York PIT taxpayers.
However, significant concerns remain for some taxpayers. In particular, absent additional state action, certain undistributed foreign earnings would be included in state AGI for the owners of “pass through” businesses such as partnerships and LLCs, which pay tax on their business earnings at the individual level through the state’s personal income tax. This so-called “transition” or “deemed repatriated” income was made taxable at the federal level under the newly adopted IRC §965. This provision requires taxpayers to pay a one-time federal tax on accumulated foreign profits regardless if such profits are actually repatriated to U.S. taxpayers.
Importantly, this change in federal tax law was accompanied by a significant reduction in tax rates and other reforms that limited its impact at the federal level – changes that do not flow through to state tax law. As part of the state’s FY 2019 budget, however, the Governor proposed and the legislature adopted legislation to “exempts” this category of income from taxation under the corporate franchise tax and insurance tax.
For these reasons, we are supporting legislation to eliminate increased state tax liability for owners of unincorporated businesses due to these undistributed foreign earnings. Under the change proposed in S.9052, these taxpayers’ state PIT liability would continue to be calculated in the same manner as it was prior to federal reforms, so that the state would see neither an increase nor decrease in tax revenues relative to pre-TCJA levels. Moreover, once these foreign earnings were actually paid to New York taxpayers, they would become fully taxable under the state’s personal income tax, so this legislative change mostly affects the timing, rather than the taxability, of these foreign earnings.
Note, to effectuate the same outcome under the NYC income tax, a similar amendment would have to be made to NYC Administrative Code §11-1712. This proposed state change would automatically be reflected in the Yonkers city income tax surcharge, which is calculated as a percentage of state PIT liability.
Several states have already acted on, or are considering, similar decoupling legislation, while others avoid these types of issues by not automatically conforming to federal changes.
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.9052.