Tax Provisions of New Yorks 2013/2014 Budget Act

For the first time in 30 years, the New York State Legislature in Albany passed an on-time budget three years in a row. Governor Andrew Cuomo and legislative leaders touted its friendliness to families, businesses, and the middle class. The $141.2 billion budget holds spending increases to less than 2% for the third consecutive year, without raising any taxes or fees. But even though the 2013/2014 Budget Act (Chapter 59 of the Laws of 2013) features no tax increases, it does extend some prior tax increases originally set to expire after the 2014 tax year. The following are the most significant provisions likely to affect most taxpayers and their advisors.

Personal Income Taxes

Personal income tax rate. The Budget Act extends the temporary 8.82% personal income tax rate, which was set to expire after the 2014 tax year, for an additional three years, through 2017. Provisions eliminating the tax benefits by recapturing the lower tax rates are also extended for an additional three years, through 2017.

Standard deduction. The Budget Act continues the indexing of the standard deduction for an additional three years, through 2017. After that, the New York standard deduction will remain fixed at the 2017 amount.

Limitation on itemized deductions. The Budget Act extends the limitation on itemized deductions for those taxpayers that have New York adjusted gross income (AGI) in excess of $10 million for an additional three years, through 2015.

Family tax relief credit The Budget Act creates the family tax relief credit, a new refundable credit of $350. The Department of Taxation and Finance (DTF) will determine which taxpayers are eligible for this credit by utilizing tax returns filed by taxpayers two years prior-that is, information on the 2011 New York State tax return will be used in determining taxpayers eligible for the credit in 2013. This determination must be made on or before October 15 of each year. To be eligible for this credit, taxpayers must be New York State residents; must have claimed one or more dependents who are less than 17 years old; and must have New York AGI between $40,000 and $300,000. When the DTF determines that a taxpayer is eligible for this credit, it will make an advance payment of the $350 credit to the taxpayer.

Small business modification. Beginning in tax year 2014, the Budget Act creates a new subtraction modification for small businesses (defined as a sole proprietor or farm business, with one or more employees, whose net business or farm income is less than $250,000). For 2014, the subtraction is 3% of the small business net of income gain, loss, and deductions. The subtraction increases to 3.75% for 2015 and 5% for 2016 and thereafter.

Corporate Taxes

Qualified manufacturer tax reduction. Effective for tax years beginning on or after January 1,2014, the Budget Act reduces the tax rates for "qualified manufacturers." This reduction applies to all tax bases, entire net income (EN1), capital, alternative minimum tax (AMT), and fixed-dollar minimum tax. The tax rate or amount is reduced as follows:

* For the 2014 tax year, the reduction on each tax base is 9.2%.

* For the 2015 tax year, the reduction on each tax base is 12.3%.

* For the 2016 tax year, the reduction on each tax base is 15.4%.

* For tax years beginning on or after January 1, 2018, the reduction on each tax base is 25%.

The reduced tax rates for qualified manufacturers are shown in the Exhibit.

For purposes of the AMT and the reduced fixed-dollar minimum tax, the definition of a qualified manufacturer is identical to that used to determine whether a taxpayer qualifies for the reduced tax rate on ENI; for the capital tax, it is identical to the definition used to determine whether a taxpayer qualifies for the reduced tax rate on the capital base.

Business incubator and innovation hot spots. The Budget Act creates a new type of economic area-New York State innovation hot spots, to be designated by the Empire State Development Corporation (ESDC)-in which certain taxpayers are eligible for specified tax breaks. In the state fiscal year 2013/2014, the ESDC may designate up to five innovation hot spots. It may designate up to five additional innovation hot spots in 2014/2015.

Entities in areas designated as innovation hot spots must demonstrate an affiliation with and support of at least one college, university, or independent research institution, and must offer programs consistent with regional economic development strategies. Qualified entities in innovation hot spots are eligible for the following tax benefits for five taxable years, beginning with the year the entity becomes a tenant in or part of an innovation hot spot:

* Qualified entities taxable under New York Tax Law Article 9-A located completely within the hot spot are only liable for the fixed-dollar minimum tax.

* Qualified entities located inside and outside of the hot spot, and corporate partners of qualified entities, are allowed a deduction for the amount of income or gain attributable to operations in the hot spot.

* Individuals who are sole proprietors of a qualified entity, or who are partners, members, or shareholders of a partnership, limited liability company, or S corporation (respectively) that is a qualified entity, are allowed a deduction for the amount of income or gain attributable to operations at the hot spot (also available under the New York City personal income tax on residents).

* Qualified entities are also eligible for a credit or refund of sales and use tax imposed on the retail sale of tangible personal property or services.

If a taxpayer claims any of the above innovation hot spot tax benefits, that taxpayer may not claim any other New York State exemptions, deductions, credits, or refunds, to the extent that they are attributable to the business operations in the innovation hot spot.

Royalty income loophole closer. The 2003/2004 Budget Act enacted restrictions on the deduction of royalty payments to related affiliates. Taxpayers who made royalty payments to related affiliates were required to add back the amount of the payments to taxable income if they were deducted when calculating federal taxable income. To avoid double taxation if the royalty recipient was also a New York taxpayer, the statute allowed the recipient to exclude the royalty income if the related member added back the deduction for the royalty payment expense. The 2003/2004 Budget Act did not adequately define the term "related member," causing some ambiguity as to whether the royalty payor and payee were subject to this addback.

To avoid this double taxation of the royalty income, New York corporate taxpayers would create a related corporation in New York for the purpose of paying royalties. This corporation would have a low business allocation percentage (BAP). Because both the royalty payors and recipients would be New York taxpayers, the royalty payor would have to add back the royalty in computing ENI, whereas the royalty recipient (presumably with a high BAP) would be able to exclude the royalty income from the computation of ENI.

To close this loophole, the 2013/2014 Budget Act repeals the above exclusion and replaces it with four exceptions to the addback requirement:

* If the taxpayer's related member paid significant taxes on the royalty payment in other jurisdictions

* If the related member paid all or part of the royalty payment it received to a third party for a valid business purpose

* If the related member is organized under the laws of a foreign country that has a tax treaty with the United States

* If the taxpayer and the DTF agree to alternative adjustments that more appropriately reflect the taxpayer's income.

To correct the ambiguity surrounding the term "related member" in the 2003/2004 act, the current act utilizes the definition of related member by referring to Internal Revenue Code (IRC) section 465(b)(3)(C), but using a 50% ownership test in place of a 10% ownership test.

MTA surcharge. Although originally enacted in 1982 as a temporary measure, the MTA surcharge has been extended year after year. For corporate taxpayers, the 17% MTA surchaige is calculated based on the 9% New York corporate franchise tax rate that went into effect in 1997. The Budget Act once again extends the life of this surcharge-giving a new meaning to the word "temporary"-for five years, to taxable years ending before December 31,2018.

Tax Credits

Sunset of the temporary deferral of certain tax credits. The 2010/2011 Budget Act required taxpayers to defer the use and refund of certain tax credits if they exceeded $2 million in aggregate for tax credits generated in tax years beginning on or after January 1, 2010, but before January 1, 2013. The 2013/2014 Budget Act does not extend this temporary suspension.

Credit amounts that were deferred were accumulated in one of two new credits: the temporary deferral nonrefundable payout credit and the temporary deferral refundable payout credit. The amounts of these credits will either remain the same or will grow until tax year 2013.

Taxpayers can begin to use the nonrefundable payout credit on their 2013 tax returns. Any amounts not used can be carried forward indefinitely. Taxpayers can use and refund 50% of the refundable payout credit on their 2013 tax return, 75% of the remaining credit on their 2014 tax return, and the entire remainder on their 2015 tax return.

The credits that were subject to this temporary deferral are as follows:

* Investment tax credit and employment incentive credit

* Empire Zone (EZ) investment tax credit and employment incentive credit

* Mortgage servicing tax credit

* EZ wage tax credit

* Special additional mortgage recording tax credit

* EZ capital tax credit

* Credit for fuel cell electric generating equipment expenditures

* Qualified EZ Enterprise (QEZE) credit for real property taxes

* Alternative fuels credit

* QEZE tax reduction credit

* Green building credit

* Brownfield redevelopment credit

* Conservation easement tax credit

* Remediated Brownfield credit for real property taxes

* Empire State commercial production credit

* Environmental remediation insurance credit

* Clean heating fuel credit

* Biofiiel production credit

* Credit for companies that provide transportation to individuals with disabilities

* Credit for employment of persons with disabilities

* Power for Jobs credit

* Credit for certain investments in certified capital companies (CAPCO credit)

* Qualified emerging technology company (QETC) employment credit

* Security training tax credit

* QETC capital credit

* Solar energy system equipment credit

* QETC facilities, operations, and training credit

* Credit for rehabilitation of historic properties

* Credit for purchase of an automated external defibrillator

* Historic homeownership rehabilitation credit

* Low-income housing credit.

Rehabilitation of historic properties credit The credit for enhanced rehabilitation of historic properties, which was set to sunset for tax years beginning after December 31,2014, has been extended for five years, through tax year 2019. In addition, this credit (previously a nonrefundable credit) is now fully refundable.

The enhanced rehabilitation of historic properties credit is equal to 100% of the federal credit, up to a maximum of $5 million, through the end of tax year 2019. For tax years beginning on or after January 1, 2020, the credit reverts to an equivalent of 30% of the federal credit, up to a maximum of $100,000.

Historic homeownership rehabilitation credit The enhanced historic homeownership rehabilitation credit, which provides for an increased maximum credit of $25,000 to $50,000 per residence, was set to sunset for tax years beginning after December 31, 2014; however, it has been extended through tax year 2019. In addition, the credit will now be refundable for taxpayers with New York AGI of $60,000 or less.

"Hire a Vet" credit The Budget Act created the nonrefundable Hire a Vet credit for employing a qualified veteran. Although this credit is effective as of March 28, 2013, it is allowed for taxable years beginning after January 1,2015, but before January 1, 2017. In order to qualify for the credit, a veteran must be employed for no less than one year and no less than 35 hours each week; taxpayers can claim the credit in the year in which the veteran completes one year of service with the taxpayer.

The credit is equal to 10% of the total amount of wages paid during the veteran's first full year of employment. If the veteran is disabled, the amount of the credit is 15% of total wages paid. The credit is capped at a maximum of $5,000 per veteran or $15,000 per disabled veteran. Any unused credit may be carried forward to the following three years.

Minimum wage reimbursement credit The Budget Act creates the minimum wage reimbursement credit. This credit is available to C corporations and S corporations (taxable under Articles 9, 9-A, 32, or 33), sole proprietorships, limited liability companies, and partnerships for wages paid to new eligible employees in tax years beginning on or after January 1,2014, but before January 1, 2019.

Employers may not discharge a current employee and replace that employee for the exclusive purpose of qualifying for the minimum wage reimbursement credit. In order to qualify for the minimum wage reimbursement credit, an employee must be a student between the ages of 16 and 19 who is employed by an eligible employer in New York and paid at the minimum wage rate.

The credit is equal to the number of hours the eligible employee worked, multiplied by the credit rate as follows:

* For the 2014 tax year, the credit rate is $0.75.

* For the 2015 tax year, the credit rate is $1.31.

* For the 2016 through 2018 tax years, the credit rate is $1.35.

In the event that the federal minimum wage is increased to more than 85% of New York's minimum wage, the credit rates will be reduced to the difference between New York's minimum wage and the federal minimum wage. The reduction will be effective on the first day that the eligible employer is required to pay the increased federal minimum wage.

Eligible employees may not be used as the basis for this credit if they are used as the basis for any other credit under the tax law.

Real Property Taxes

Eliminating improper STAR exemptions. Due to the perception that some individuals are claiming STAR exemptions that they are not entitled to, all basic STAR beneficiaries are now required to register, effective with the 2014 tax year. The DTF must give all basic STAR beneficiaries at least 60 days notice of the new requirements for registration and essential information that can be used in determining their eligibility; taxpayers will then have one year to register. The DTF will notify the taxpayers of their eligibility for the basic STAR exemption after they have registered. Taxpayers who wish to dispute the DTF's decision regarding the eligibility for the basic STAR exemption will have 45 days to appeal. Two levels of administrative appeal exist within the department, as well as judicial review.

In cases where there has been a material misstatement of facts by the applicant, the law provides for penalties ranging from $100 to $2,500. These penalties will be given to the local governments that provide the STAR exemption.

In addition, the Budget Act provides for retroactive recapture of prior-year STAR benefits by the state, up to a maximum of six years but not extending to years earlier than 2010 assessment rolls, as well as disqualification for up to six future years.

Miscellaneous Provisions

E-file mandate. The Budget Act extends the e-file requirement for a tax preparer that prepares authorized tax documents for more than 10 different taxpayers for three years, through December 31, 2016. If this provision of the law had reverted back, it would have reverted the prior threshold of more than 100 returns.

Warrantless wage garnishments. The Budget Act permits the DTF to serve notice of wage garnishments on individual tax debtors or on their employers without first filing a warrant in the appropriate County Clerk's office and in the Department of State, as was previously required. The DTF can file a wage garnishment if the taxpayer fails to pay within 21 calendar days after a notice and demand is issued, or 10 business days for amounts exceeding $100,000. These wage garnishments must be served within six years of the date a warrant could first be filed. The wage garnishment remains in effect until the liability is satisfied, or until 20 years from the first date a warrant could be filed.

Suspension of drivers' licenses of delinquent taxpayers. The Budget Act requires the DTF and Department of Motor Vehicles (DMV) to enter into a written agreement by September 28, 2013, that permits the DTF to have the DMV suspend the New York State drivers' licenses of certain taxpayers who owe past-due tax liabilities equal to or in excess of $10,000 and who fail to pay the past due amount or enter into a payment agreement with the DMV. The DTF must provide at least 60 days' notice to taxpayers that their license is subject to suspension and must provide information about how the taxpayer can avoid suspension by fully satisfying their debts or entering into a payment arrangement.

Looking to the Future

The Budget Act does contain other taxrelated provisions that fall beyond the scope of this discussion; taxpayers and their advisors are encouraged to remain abreast of these issues and related developments. It can only be hoped that the New York State Legislature will continue this run of on-time budgets in the future. ?

Mark H. Levin, MST, CPA, is an adjunct assistant professor at York College/CUNY, Jamaica, N.Y. He is also a member of The CPA Journal Editorial Board.