A measure flying through the New York State Legislature would decouple several New York City provisions still in conformity with federal tax relief provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Specifically, S. 8411/A. 10519 would decouple New York City’s business-related taxes from two IRC section 163(j) interest expense relief changes under the CARES Act (P.L. 116-136). It would also eliminate the ability of noncorporate New York City taxpayers to deduct excess business losses against other types of income by decoupling from CARES Act changes to section 461, and would keep unincorporated businesses from using at the city level section 172 net operating loss provisions enacted by the federal government in response to the pandemic.
“If the decoupling provisions in this bill are not enacted, New York City stands to lose at least $50 million in City fiscal year 2020/21 and $25 million in fiscal year 2021/22,” the sponsors said in a memo attached to the legislation. “Given that the City is facing a potential revenue gap of $5.4 billion in fiscal year 2020/21, the City cannot afford to lose these millions of dollars in revenue at this time.”
Introduced May 24, neither measure has been the subject of substantive hearings; lawmakers have been meeting by virtual means in their truncated sessions. On May 27 the State Senate passed S. 8411 on a 39–23 vote and delivered the bill to the State Assembly, where that same day it was substituted for A. 10519, ordered to a third reading, approved on a 104–40 vote, and returned to the Senate.
In its recently enacted budget (A. 9508B/S. 7508B), New York decoupled most of the state, including New York City, from the corporate income tax relief under the CARES Act. Though largely unnoticed until about a week after Gov. Andrew Cuomo (D) signed the budget bills, the decoupling represented “some of the more significant tax-related provisions in the New York Budget Act,” Deloitte Tax LLP advisers said at the time.
Notably, the budget decoupled the state and New York City from the section 163 increased interest deduction under the CARES Act. The act's changes allow businesses to deduct interest expense up to 50 percent of adjusted taxable income for the 2019 and 2020 tax years; the state and city continue to conform instead to the Tax Cuts and Jobs Act, which generally limits net business interest expense to the sum of business interest income, 30 percent of ATI, and floor plan financing interest.
S. 8411 would eliminate the ability of New York City business corporation tax, general corporation tax, unincorporated business tax, and bank tax filers to elect to use their 2019 ATI in computing their 2020 city interest expense limitations. The measure would also decouple these same New York City taxes from section 163(j)(10)(A)(ii) changes under the CARES Act that allow a greater deduction of interest payments for partners in a partnership.
The CARES Act’s changes to section 172, meanwhile, "would allow unincorporated businesses and S corporations to use NOLs to offset up to 100 percent of taxable income and to have a greater ability to carry over or carry back NOLs,” the memo said, adding that it is thus “in the City's fiscal interest to decouple” the general corporation tax, unincorporated business tax, and bank tax from those provisions.
“Note that regarding the amendments pertaining to the NOL deduction, taxpayers will not lose the ability to carry over unused NOLs caused by this bill to future tax years,” the memo added.
The measure would also decouple New York City’s general corporation tax, unincorporated business tax, and bank tax from the CARES Act changes to section 461(l) regarding the ability of noncorporate taxpayers to deduct excess business losses against other types of income. Failure to decouple would likely affect New York City’s unincorporated business tax revenue “because section 461(l) operates to limit excess business losses for UBT taxpayers that are trusts and estates, or that are treated as individuals for federal income tax purposes,” the memo said.
The measure would take effect immediately upon enactment.