Highlights From Gov. Cuomo’s FY 2022 New York State Budget

It has been a week since Governor Andrew Cuomo announced an agreement with the New York Legislature on New York State’s (“NYS”) fiscal year 2021-2022 state budget. Despite the announcement, as of this morning (April 13, 2021):

1. The actual budget has not been released, and
2. There here been no confirmation the Governor signed it.

Given we are two days away from when first quarter estimates are due for 2021, the following discussion is based on all the information that is known. While the general sentiment among practitioners is that the final budget tax provisions will mirror the summary below, nothing is 100% certain until actual budget is signed and released.
While it appears many of the anticipated tax increases (and benefits) made the final budget; there were a number of controversial tax proposals that did NOT make the final cut. The following is a summary of both:

Proposals NOT Enacted

• 1% tax on capital gains.
• Requiring all Federal S-corporations doing business in New York to be treated as S-corporations for New York tax purposes.
• A “pied-a-terre” tax on qualifying non-primary residences, including condominiums and co-ops within New York.
• Permitting the Tax Department to extend the period of time for which it was not required to accrue and pay interest on big (>$100,000) refund claims.
• Allowing the Tax Department to appeal adverse Tax Appeals Tribunal decisions.
• A tax on VRBO-type rentals, including a requirement for marketplace-provider collection.
  
  

Proposals ENACTED

• Pass-Through Entity Tax
  • The new pass-through entity tax ("PTE Tax") takes advantage of the Internal Revenue Service’s approved workaround of the $10,000 SALT deduction limit enacted as part of the 2017 Tax Cuts and Jobs Act.
  • Qualifying partnerships and S-corporations are eligible to make an annual PTE Tax election.
    • The annual election is required by the due date of the first estimated payment for the current taxable year (March 15 for calendar year taxpayers). For the 2021 tax year only, the election must be made no later than October 15, 2021 (to be effective for calendar year 2021).
    • The annual election is irrevocable.
  • In the coming days, Citrin Cooperman will issue a “Tax Alert” with a complete analysis of New York’s new PTE Tax.
    
    
• Personal Income Tax
  
  • “Temporary” income tax rate increases on high-income-earners
  • Highest NYS personal income tax rate WAS 8.82%.
  • Three new graduated rates (rates below are for married filing joint returns):
    
    • Married Filing Jointly
      • 9.65% for income over $2,155,350, but not over $5 million,
      • 10.3% for income over $5 million, but not over $25 million,
      • 10.9% for income over $25 million
    • Single
      
      • 9.65% for income over $1,616,450, but not over $5 million,
      • 10.3% for income over $5 million, but not over $25 million,
      • 10.9% for income over $25 million
  • The tax bracket benefit is phased-out as income increases and is completely gone once taxpayers earn $50,000 more than the threshold amounts for the new tax brackets.
  • The new NYS tax rates gives New York City (“NYC”) residents the unwelcomed distinction of having the highest combined state and local taxes in the country (14.78%).
  • For MFJ NYC residents that earn between $323,000 and $2,155,000 the combined NYS and NYC tax rate remains at the “reasonable” effective tax rate of 10.73
  • The new tax rates discussed above are effective January 1, 2021 and are “supposed to” revert to the 2020 rates beginning in 2028.
  • Amends NY Tax Law § 620 allowing New York resident taxpayers who own entities that pay “substantially similar” PTE Taxes in other states, a resident tax credit for their share of pass-through entity taxes paid to other states. Effective as of the 2021 tax year.
    
    
• Corporate Tax
  • “Temporary” income tax rate increase on corporations with more than $5 million of taxable income.
    
    • 6.5% to 7.25%
  • "Temporary” reinstatement of the capital base tax for non-manufacturing corporations at a rate of 0.1875%.
  • Both the income tax rate increase and reinstatement of the capital base tax are “supposed” to sunset after the 2023 tax year.
    
    
• Opportunity Zone
  • Beginning with the 2021 tax year, NYS no longer adopts the tax benefits associated with the federal Opportunity Zones Program (“OZP”).
    
    • The federal OZP allows taxpayers to defer (and sometimes avoid) tax on current capital gains if those gains are reinvested in Qualified Opportunity Funds.
    • NYS requires an add-back modification for gains deferred under the Opportunity Zones Program in the year of the deferral.
    • In subsequent years when deferred gains are recognized for federal tax purposes, NYS will permit a subtraction modification.
      
      
• Pandemic Recovery and Restart Program
  • Small Business Return-To-Work Tax Credit: Provides up to $50 million in tax credits to support small businesses in highly impacted sectors in the hiring of additional workers through 2021. $5,000-per new full time equivalent employee
  • Restaurant Return-To-Work Tax Credit: Provides up to $50 million in tax credits to support restaurants hard hit by the pandemic through 2021. Capped at $50,000 per business
  • Extend and Enhance the Musical and Theatrical Production Credit for Four Years: Provides up to $25 million in tax credits for the jump start of the industry and the support of tourism activity in the City. 25% tax credit for qualified businesses with at least $1 million in qualified expenditures (credit capped at $500,000 per business).
  • The credits have limited appropriations, and allocations of the credit must be applied for.
  • In the coming days, Citrin Cooperman will issue a “Tax Alert” with a complete analysis of the above credits.
    
    
• Real Property Tax Relief Credit
  • A new credit for individuals with qualified adjusted gross incomes ("QAGI") of less than $250,000 if New York real property taxes on their New York principal residence exceed 6% of QAGI.
  • Credit determination:
    
    • Real property tax paid in excess of the 6% floor
    • Sliding scale rate of credit that decreases from 14% to 0% as QAGI increases from $75,000 to $250,000.
      
      
• Additional Credits
  • The following credits/exemptions are extended, modified and/or enhanced:
    
    • The Film Production Credit
    • Child Care Credits
    • Sales Tax Exemption for Certain Dodd-Frank Transactions
    • Brownfield Program Credit
    • Alternative Fuels Exemption
    • Farm Workforce Retention Credit
    • Low Income Housing Credits
    • Hire-a-Vet Credit
    • Economic Transformation and Facility Redevelopment Program Credit
    • Real Property Exemption for Renewable Energy Projects
      
      
• Real Estate Transfer Tax ("RETT")
  • Grantors are prohibited from transferring RETT responsibility to grantees othr than through a written agreement.
  • Grantees who pay the tax in the absence of a written agreement are now permitted to bring an action against the grantors for reimbursement of the RETT the grantee pays.
    
    
• Employees Working Outside of New York Due to COVID
  • Protects New York businesses claiming certain tax credits and incentives (e.g., Excelsior) requiring a minimum level of New York employment against claw-backs merely because New York-based employees may have worked from a non-New York location during the pandemic.
    
    

Should you have any questions, please reach out to your Citrin Cooperman advisor or David Seiden at dseiden@citrincooperman.com.