On April 19, 2021, Governor Andrew Cuomo signed New York State's fiscal-year 2021/2022 budget bill (S.2509-C/A.3009-C).
The comprehensive budget legislation includes several changes to personal income tax, corporate franchise tax, sales and use taxes, and property tax, as well as other tax changes, many of which are scheduled to sunset after a few years. When combined with New York City’s tax rates, the state’s new income tax rates under the 2022 budget bill are some of the highest in the country.
Personal Income Tax Rate Increases
Effective for tax years commencing on or after January 1, 2021 through the end of 2027, the bill increases the personal income tax rates on high income earners, as well as creates two new temporary income tax brackets, as shown in the following table:
|Tax Bracket||Personal Income Tax rate|
|$2,155,350 to $5,000,000 (Married Filing Joint)||9.65%|
|$1,616,450 to $5,000,000 (Head of Household)|
|$1,077,550 to $5,000,000 (Single)|
|Over $5,000,000 to $25,000,000 (New - Applicable to All)||10.30%|
|Over $25,000,000 (New - Applicable to All)||10.90%|
For tax years commencing after 2027, the two newly created tax brackets will sunset, and the personal income tax rates are expected to decrease back to the 4 percent to 8.82 percent range.
In addition, for the 2021 through 2023 tax years, the bill provides a personal income tax credit for New York resident homeowners with incomes of up to $250,000 and whose total property tax exceeds 6 percent of their qualified gross income (“excess real property tax”). The amount of the credit generated varies based on the taxpayer’s qualified gross income, up to 14 percent of the amount of the excess real property tax.
Corporate Franchise Tax Rate Increases
For tax years beginning on or after January 1, 2021, the New York corporate franchise tax rate is increased from 6.5 percent to 7.25 percent for companies with a business income tax base greater than $5 million. The corporate tax rate remains at 6.5 percent for companies with a business income tax base of $5 million or less. By its terms, the increased corporate franchise tax rate will expire for tax years commencing on or after January 1, 2024.
The bill also extends application of the business capital tax base, which was expected to be phased out as of 2021, with an increased rate of 0.1875 percent for tax years beginning on or after January 1, 2021 and before January 1, 2024. Nonetheless, small businesses will continue to be exempt from the business capital tax base. The business capital tax base is now set to be completely phased out by 2024.
New Pass-Through Entity (“PTE”) Tax Election
Highly anticipated in the bill is the creation of a new PTE tax election under new Article 24-A, which effectively circumvents the $10,000 cap on the federal deduction for state and local taxes as enacted under the Tax Cuts and Jobs Act of 2017, by owners and partners of eligible PTEs. PTE tax elections can be made for tax years beginning on or after January 1, 2021. Eligible taxpayers are entities that are treated as partnerships or S corporations for federal income tax purposes, which can include limited liability companies. For the 2021 tax year only, PTEs must make the election by October 15, 2021. For tax years after 2021, the annual election must be made by the due date of the first estimated payment (March 15).
The new PTE tax will generally operate in a similar fashion as other states’ PTE tax regimes (e.g., Connecticut and New Jersey). These require the electing PTE to calculate its tax base and pay a state income tax, while retaining certain pass-through features (including a state tax credit for use by owners when filing and paying their state personal income tax).
The tax rates on the taxable income of electing PTEs range from 6.85 percent to 10.90 percent. Owners (i.e., partners or S corporation shareholders) of electing PTEs are allowed a refundable credit against their personal income tax, based on the owners’ distributive share of the PTE tax paid. In addition, PTE owners may claim credits for multiple electing PTEs. Furthermore, the new legislation provides that residents are allowed credits against their New York personal income taxes for any PTE taxes paid to other jurisdictions, which are substantially similar to New York’s PTE tax.
Please refer to a separate Friedman tax alert providing an in-depth look at the mechanics of New York’s PTE tax regime, which may be accessed HERE.
Decoupling from the Federal Opportunity Zones Program
For tax years commencing on or after January 1, 2021, the bill decouples from the Federal Opportunity Zones Program, which generally defers the recognition of capital gain for eligible taxpayers who make an equity investment in a qualified opportunity fund (“QOF”). For purposes of New York State’s Corporate Franchise Tax (Article 9-A); Personal Income Tax (Article 22); and New York City’s General Corporation Tax, Business Corporation Tax, and Personal Income Tax; taxpayers will now generally be required to add-back any gain excluded from federal gross income for purposes of computing New York entire net income (for corporate taxpayers) and adjusted gross income (for individual taxpayers).
NYS Sales & Use Tax – Technical Correction
For sales tax purposes, the bill makes a technical correction to the definition of “vendor.” The correction clarifies previous legislation and administrative guidance, which have been in place since November 2019, that remote vendors have economic nexus in New York if they make over $500,000 in sales and have more than 100 sales into New York in the previous four quarters.
Real Estate Transfer Tax
For conveyances of real property made on or after July 1, 2021, or pursuant to binding agreements for conveyances of property made on or before April 1, 2021, the bill extends the definition of “responsible person liable for the real estate transfer tax.” Now, this designation refers to any person who is an officer, employee, manager or member with a duty to act on behalf of a corporation, partnership, LLC or individual proprietorship to comply with New York’s real estate transfer tax rules.
The bill contains an exemption for publicly traded companies, real estate investment trusts and mutual funds that are members of LLCs from the requirement to disclose all of their members or shareholders on a real estate transfer tax return, if the subject sale is of a building with up to four residential units.
- The increased personal income tax and corporate franchise tax rates for the highest earners are effective for the 2021 tax year. Taxpayers should assess the impact of the increased rates as soon as possible for purposes of their quarterly estimated tax payment requirements.
- While not specifically discussed above, the bill also extends a number of tax credits, such as the Brownfield and Excelsior Investment tax credits, among others, and creates new tax credit programs targeted at the restaurant, and musical and theatrical production industries.