New York’s newly enacted budget decouples the state and New York City from the pandemic-related federal corporate income tax relief provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).
The move has largely gone unnoticed. Gov. Andrew Cuomo (D) signed the budget bills April 3, but it wasn’t until April 10 that Deloitte Tax LLP advisers pointed out in a client alert that provisions decoupling from the CARES Act represent “some of the more significant tax-related provisions in the New York Budget Act.”
New York conforms to the IRC on a rolling basis. However, the New York budget act’s final revenue bill (A. 9508B/S. 7508B) contains language saying that for tax years beginning before January 1, 2022, any amendments made to the IRC after March 1, 2020, shall not apply. That time frame means New York does not conform to most IRC changes made under the CARES Act, which President Trump signed into law on March 27.
Advisers from Deloitte and Pillsbury Winthrop Shaw Pittman LLP highlighted that this means New York is decoupling from the section 163(j) interest limitation relief provided under the CARES Act. The Tax Cuts and Jobs Act generally limited the federal deduction for net business interest expense to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest. The CARES Act modified those limitations by allowing businesses to deduct interest expense up to 50 percent of ATI for the 2019 and 2020 tax years.
In other words, New York state and New York City’s deductions for business interest expenses will continue to be limited to 30 percent of ATI plus business interest income and floor plan financing interest, consistent with the TCJA.
“As such, this Budget Act provision will require separate IRC section 163(j) calculation and tracking of the New York limit and any resultant carryover of any excess interest expense not utilized; moreover, due to the lower percentage limitation in New York as compared to federal, it is possible for a taxpayer to have a New York interest expense limitation and no federal interest expense limitation for tax years beginning in 2019 or 2020,” Deloitte advisers wrote.
The final budget language contains one narrowly targeted exception under which New York and New York City conform to the CARES Act’s modifications to section 163(j)(10)(B)(i). Deloitte advisers said New York taxpayers thus can elect to use their 2019 ATI in computing their 2020 state and city interest expense limitations.
New York state and New York City also will not conform to the CARES Act's net operating loss provisions, which temporarily eliminate the TCJA’s 80 percent limitation on NOLs and allow federal taxpayers to carry back NOLs from 2018, 2019, and 2020 for five years. But according to Pillsbury advisers, the CARES Act's NOL provisions “do not have a significant impact for New York Corporate Franchise Tax purposes because taxpayers have a state-specific NOL carryforward for tax years beginning on or after January 1, 2015.”
“While the ability to carry NOLs from the 2018 and 2019 tax years might have reached back into the 2013 or 2014 tax years, the Budget decoupling from the CARES Act eliminates any chance the NOL provisions would apply to the calculation of New York taxable income,” the Pillsbury client alert said.
Pillsbury advisers later added that New York “is the first state to address conformity to the tax relief provisions of the CARES Act,” and that “it will be interesting to see how other states respond to the CARES Act tax provisions.”
New York’s budget continues to lower personal income tax rates as part of a multiyear plan enacted in 2016, and it creates a refundable, discretionary, green jobs tax credit and a green investment tax credit.