New York Tax Reform Decisions to Make Now

Transcription

1 Tax Executives Institute FIFTY FIRST ANNUAL TAX SYMPOSIUM New York Tax Reform Decisions to Make Now Leah Robinson Partner Sutherland Asbill & Brennan LLP (212) Marc Simonetti Partner Sutherland Asbill & Brennan LLP (212)

2 Overview of the Tax Reform Repeal of Article 32 (tax on financial corporations) Within Article 9-A, changes to: Nexus Combined reporting Taxes bases: Composition and computation Apportionment NOLs Credits Rates Most provisions effective for tax years beginning on or after January 1, 2015 New York City No changes yet 2

3 Decisions to Make Now (or Soon) 1. Whether to register new taxpayers and make estimated payments 2. Whether to make the election to include non-unitary entities in the combined group (consider this even if unitary ) 3. Determine due diligence policy and how to document implementation 4. Whether to elect to use PYNOLs over two years or ten years 5. Consider the impact of the decisions above on the Qualified New York Manufacturer incentive 6. Lobby New York City for the changes appropriate for your industry or business 3

4 Nexus Overview Economic Nexus Inevitable Constitutional Challenges Groups with P.L Protected Members Corporate Partners Fulfillment Services Exception Repealed Alien Corporations 4

5 Nexus New Economic Nexus Standard Current law: A corporation must have a physical presence in New York to be subject to tax under Article 9-A or Article 32 (with a single exception). New law: A corporation is subject to tax under the new law if it is deriving receipts from activity in [New York]. A corporation is each such member is deriving receipts from activity in [New York] if it has $1MM or more of receipts included in the numerator of its apportionment factor, as determined under the new law s apportionment sourcing rules (i.e., New York receipts). Rule for combined groups: Aggregate the New York receipts of each member of a combined group having at least $10,000 in New York receipts. If the aggregate New York receipts of the combined group meets the $1MM threshold, each such member is deriving receipts from activity in [New York]. 5

6 Nexus New Economic Nexus Standard New law retains the current economic nexus standards for certain credit card corporations, subjecting such corporations to tax if they: Have issued credit cards (including bank, credit, travel and entertainment cards) to 1,000 or more customers with a mailing address within New York (New York customers) Have 1,000 or more locations in the state covered by merchant customer contracts to which the corporation remitted payments for credit card transactions (New York merchant locations), or Have New York customers plus New York merchant locations totaling 1,000 or more 6

7 Nexus Inevitable Constitutional Challenges Open question as to whether having economic nexus with a state with no physical presence whatsoever is sufficient for a state to impose tax Due Process Clause requires some minimum connection between the state and the person it seeks to tax. Commerce Clause, on the other hand, is more restrictive and requires a substantial nexus between the state and the person it seeks to tax 7

8 Nexus Corporate Partner Nexus Current law (via a regulation): An out-of-state corporation is subject to tax in New York if it is: A general partner in a partnership doing business in New York, or A limited partner in a partnership (other than a portfolio investment partnership) doing business in New York and meets one of ten enumerated circumstances New law: Grants the Department the authority to adopt regulations that expand the scope of its existing corporate partner nexus regulation, such that a corporation is subject to tax in New York if: It is any type of partner in a partnership that is doing business in New York, or It has economic nexus with New York This change closely mirrors (except for the economic nexus aspect) New York City s corporate partner nexus rule 8

9 Nexus: Fulfillment Services Exception Repealed Current law: A corporation is not taxable in New York solely by reason of using fulfillment services provided by an unrelated person and storing inventory at the fulfillment provider s premises. For this purpose, fulfillment services are: Accepting orders electronically or by mail, telephone, telefax, or Internet Responding to consumer correspondence or inquiries electronically or by mail, telephone, telefax, or Internet; Billing and collection activities, or Shipping orders from an inventory of products offered for sale by the out-of-state corporation New law: The fulfillment services exception is repealed. 9

10 Nexus: Economic Nexus and P.L Protection Out-of-state corporations whose activities fall within those described in 15 U.S.C (P.L ) are not subject to a state s income tax, regardless of whether the state employs a physical presence standard or an economic nexus standard However, P.L protected companies should carefully consider the combined effect of the new law s economic nexus provisions, combined reporting regime and apportionment provisions (which reflect a Finnigan approach) Inclusion in a combined report could cause P.L protected members to be effectively taxable. While this was a risk under current law, the economic nexus provisions increase the likelihood of this situation arising Disney Enterprises, Inc. v. Tax Appeals Tribunal, 888 N.E.2d 1029 (N.Y. 2008). Citicorp North America, Inc. v. Franchise Tax Board, 100 Cal. Rptr. 2d 509 (Cal. Ct. App. 2000). 10

11 Nexus Alien Corporations Alien corporations are those organized in a jurisdiction outside of the United States Current law (Article 9-A): Taxable alien corporations are subject to tax on their worldwide income New law: An alien corporation: Is subject to tax if, under the IRC, the corporation: Is treated as a domestic corporation, or Has effectively connected income If taxable, tax is limited to the alien s effectively connected income (see additional discussion in tax base computations, below) 11

12 Tax Base and Income Classification Overview Changes to the Tax Base Changes to the Entire Net Income Tax Base (Now Called the Business Income Tax Base) Changes to Rules Regarding Expense Attribution and a New Election ENI Tax Base Changes for Alien Corporations Changes to/phase-out of the Capital Tax Base Metropolitan Transportation Business Tax Surcharge Rate Change/Simplification 12

13 Tax Base and Income Classification Changes to the Tax Base Current law: Article 9-A taxpayers (general corporations) pay: 1. Tax due on the highest of four bases: Apportioned entire net (i.e., federal taxable) income (ENI) Apportioned capital (net) Apportioned minimum taxable income, and A fixed-dollar minimum 2. Plus a tax on apportioned subsidiary capital 3. Plus, in some cases, the temporary Metropolitan Transportation Business Surtax Current law: Article 32 taxpayers (banking corporations) pay: Tax due on the highest of two bases: Apportioned ENI (the computation of which varies from the computation of ENI under Article 9-A), and Apportioned alternative minimum tax, which is paid on the highest of three bases: (1) taxable assets, (2) alternative ENI, and (3) a fixed dollar minimum) 13

14 Tax Base and Income Classification Changes New law: Article 9-A taxpayers (general corporations and banking corporations) pay: 1. Tax due on the highest of four three bases: Entire net (i.e., federal taxable) income (ENI now called business income base ) Capital (net) (until this base phases out in 2021) Minimum taxable income, and A fixed dollar minimum 2. Tax on subsidiary capital, and 3. Plus, in some cases, the temporary Metropolitan Transportation Business Surtax Current law, Article 32 taxpayers (banking corporations) pay: Tax due on the highest of two bases: ENI (the computation of which varies from the computation of ENI under Article 9-A), and Alternative minimum tax, which is paid on the highest of three bases: (1) taxable assets, (2) alternative ENI, and (3) a fixed dollar minimum) 14

15 Tax Base and Income Classification Changes For tax years beginning on or after January 1, 2016, new law reduces the current tax rate on the ENI base (renamed the business income base) from 7.1% to 6.5% for most taxpayers (some taxpayers will be subject to even lower rates). New law maintains the current capital base tax rate of 0.15% but includes a phasedown of the rate such that the capital base tax rate will be 0% for tax years beginning on or after January 1, New law also increases the cap under this base for most taxpayers from $1 million to $5 million. With respect to the fixed dollar minimum tax, the new law adopts additional tax brackets and substantially increases the tax amount for some taxpayers. Example: Current law: The top bracket includes taxpayers with receipts over $25 million and imposes tax of only $4,500 New law: The highest bracket is for taxpayers with New York receipts over $1 billion and imposes tax of $200,000 15

16 Tax Base and Income Classification Comparison CURRENT Entire Net Income Base Modified federal ENI - Income from subsidiary capital less attributed expenses Deducted from ENI and not included in ENI base. Apportioned subsidiary capital is subject to a separate tax - Income from investment capital Less attributed expenses Apportioned by Investment Allocation Percentage (IAP) Result + = Business income Apportioned by Business Allocation Percentage (BAP) Result = taxable ENI NEW Business Income Base Modified federal ENI - Investment Income less attributed interest expense or 40% expenses - Other exempt income less attributed interest expense or 40% expenses = Business income Apportioned by Business Allocation Percentage (BAP) 16

17 Tax Base and Income Classification Current Entire Net Income Tax Base Income from Investment Capital (Current) Income from investments in stocks, bonds and other securities, corporate and governmental, not held for sale to customers in the regular course of business, exclusive of subsidiary capital and stock issued by the taxpayer (investment capital) less expenses that are directly or indirectly attributable to investment capital A taxpayer can elect to treat cash as investment capital or business capital. Investment income is apportioned to New York using an IAP, which is determined by reference to the New York allocation percentages of each issuer or obligor of the items of investment capital, as is required to be reported to and published by the Department 17

18 Tax Base and Income Classification Current Entire Net Income Tax Base Business income (current) Business income is ENI less: (a) income from subsidiary capital; and (b) income from investment capital It is apportioned by a BAP consisting of the taxpayer s New York receipts over all receipts 18

19 Tax Base and Income Classification New Business Income Tax Base Income from Investment Capital (New) Income from investment capital is no longer subject to tax, but the definition of investment income is dramatically restricted: Investments in stock held for more than six consecutive months, but not held for sale to customers For purposes of computing the six-month holding period, the new law recognizes that a taxpayer may acquire stock during the second half of the tax year that would eventually be held for more than six consecutive months but that would not have been held that long by the end of the tax year. A presumption and clawback exist. Regardless of how long held, certain stock cannot qualify as investment capital, including: Stock in a unitary corporation, stock in a corporation included in the same combined group, stock issued by the taxpayer, and stock that is a qualified financial instrument and for which the taxpayer has made the 8% apportionment election If a taxpayer directly or indirectly owns less than 20% of the voting power of a corporation, it is presumed to be non-unitary with the taxpayer 19

20 Tax Base and Income Classification New Business Income Tax Base New category of other exempt income, which consists of: Certain income from controlled foreign corporations (CFCs) and Exempt CFC income is the income required to be included in the taxpayer s federal gross income pursuant to IRC 951, received from a corporation that is conducting a unitary business with the taxpayer but that is not included in a combined report with the taxpayer Dividends from unitary subsidiaries that are not included in the taxpayer s combined report (for example: certain alien corporations or corporations taxable under Article 9, or Article 33) What about gain on the sale of the stock of a unitary sub? 20

21 Tax Base and Income Classification Changes to Expense Attribution Current law (via administrative guidance): Taxpayers assign certain expenses to investment income and to business income before apportionment Generally, taxpayers would prefer to attribute an expense to the income category with the highest New York allocation percentage to maximize the benefit of the expense Department auditors seem to prefer to minimize the double tax benefit a taxpayer would receive if the taxpayer were allowed to use an expense incurred while generating income apportioned at a low rate to offset income apportioned at a higher rate New law: Departs from current expense attribution in three significant ways 21

22 Tax Base and Income Classification Changes to Expense Attribution First, the role of expense attribution changes dramatically. Current law: Expense attribution merely shifts expenses between investment income and business income, resulting in a shift between the amounts that will be apportioned using the taxpayer s BAP or IAP New law: Any expense attributed to investment income (or other exempt income) actually increases the amount of taxable business income Second, under new law, only interest expenses will be attributed to investment income and other exempt income Third, new law creates a new election for computing the amount to be attributed.** ** The Department of Taxation and Finance will be releasing updated guidance on expense attribution soon. 22

23 Tax Base and Income Classification Changes to Expense Attribution The expense attribution election: Instead of determining the amount of interest expenses directly and indirectly attributable to investment income and to other exempt income, there is an annual election to reduce those income amounts by a fixed 40 percent in lieu of assigning actual interest deductions. This results in an increase in taxable business income by the same amount. The election does not apply to the portion of other exempt income consisting of dividends from Article 9 corporations (certain utility companies) or Article 33 corporations (insurance companies). A taxpayer making the 40 percent election must make it for both investment income and other exempt income (and is not precluded from making the election if all of its other exempt income does not qualify for the election)** ** The Department of Taxation and Finance will be releasing updated guidance on expense attribution soon. 23

24 Tax Base and Income Classification ENI Tax Base - Alien Corporations Current law: Alien corporations subject to Franchise Tax are taxed on worldwide income apportioned using world-wide factors (true only for Article 9-A taxpayers; Article 32 taxpayers use only their US branches income) New law: Limits taxable business income to income that is effectively connected with the conduct of a U.S. trade or business (as defined in IRC 882) However, all dividends and interest on stock, securities or indebtedness of any kind are included in ENI only if such income is effectively connected with the conduct of a U.S. trade or business (as determined under IRC 864) Such income is then divided into investment income, other exempt income and business income as described above Additionally, alien corporations are required to add back income that is exempt from taxation under a federal income tax treaty, but only if: That income is effectively connected with the conduct of a U.S. trade or business (as defined in IRC 882), and Relevant treaty does not prohibit state taxation of such income 24

25 Tax Base and Income Classification Current Capital (Net) Tax Base Net Business Capital + Net Investment capital Apportioned by Business Allocation Percentage (BAP) Apportioned by Investment Allocation Percentage (IAP) Result + Result - Intercorporate stock/holdings/debt = Capital base 25

26 Tax Base and Income Classification Changes to the Capital Tax Base Current law: Taxpayers compute the tax on capital base by: Allocating investment capital (less attributable liabilities, including debt and other liabilities) by the IAP Allocating business capital (less attributable liabilities) by the BAP, and Computing tax on the sum of those two amounts New law: Investment capital is removed from the computation of the capital base so that it will be computed solely on business capital Since business capital is defined by reference to investment capital, the new definition of investment capital means that business capital includes substantially more than it does under the current rules Capital tax base s tax rate phases down to zero for tax years starting on or after January 1, 2021 Cap increases from $1 million to $5 million for most taxpayers; but there s a $350,000 cap for qualified New York manufacturers 26

27 Rate Reductions Income Tax Rates See slide 47 for the definition of Qualified New York Manufacturer 27

28 Tax Base and Income Classification MTA Surcharge Current law: Temporary metropolitan transportation business tax surcharge has been imposed on New York taxpayers with activities in the metropolitan commuter transportation district since 1982 Surcharge is imposed at a rate of 17% of the tax computed on the highest of the four bases (using 1998 tax rates) after any credits are applied New law: Metropolitan transportation business tax surcharge: Becomes permanent Is assessed based on economic nexus standards Continues to use three-factor apportionment Is computed on the metropolitan commuter transportation district s portion of the highest of the tax bases before credits (instead of after), and Is computed at a rate that is adjusted annually (the rate for tax years beginning after January 1, 2015, but before January 1, 2016, is 25.6% of the tax imposed on business income) 28

29 Combined Reporting Overview Prior and current law Determining the combined group Computing the tax 29

30 Combined Reporting Prior and Current Law Through 2006, combined report in Article 9-A if: Corporations are engaged in a unitary business Meet the common ownership threshold (80%), and Distortion resulted from filing separately 2007 through 2014, combined report in Article 9-A if: Corporations are engaged in a unitary business (this requirement was not always explicitly stated, see TSB-08(2)C) Meet the common ownership threshold (80%), and Other requirement, determined by either of two standards: Hard Distortion: Substantial intercorporate transactions exist among the corporations (regardless of the transfer price for those intercorporate transactions). Soft Distortion: Separate filing distorts New York income or activities (economic substance, business purpose), although there was no affirmative grant of this discretion under the new statute. All prior and current years: Aliens excluded, companies taxable under other articles not includible in Article 9-A group (but may be considered in measuring distortion for Article 9-A group) 30

31 Combined Reporting Prior and Current Law Since 1998, combined report required in Article 32 if: Meet the common ownership threshold (80%), and No distortion resulted from filing combined Since 1998, combined report permissible in Article 32 if: Corporations are engaged in a unitary business Meet the common ownership threshold (65%), and Other requirement, determined by either of two standards: Hard Distortion: Substantial intercorporate transactions exist among the corporations (regardless of the transfer price for those intercorporate transactions). Soft Distortion: Separate filing distorts New York income or activities (economic substance, business purpose). All prior years: Only banking corporations and bank holding companies includible in Article 32 group 31

32 Combined Reporting Determining the Combined Group New law: Related corporations are required to file a combined report if: Engaged in a unitary business with the taxpayer More-than-50% direct or indirect common ownership test is met (measured by voting power of capital stock) Distortion (hard or soft) is irrelevant 32

33 Combined Reporting Determining the Combined Group Corporations that may be included on a combined report: General domestic corporations Corporations currently taxable under Article 32 (excluded from 9-A groups under current law, but may form own Article 32 groups) Certain alien corporations (excluded under current law) Combinable captive insurance companies (only overcapitalized captives includible under current law) Captive real estate investment trusts (REITs), and Captive regulated investment companies (RICs) Certain corporations may not be included in a combined report (even if a commonly owned group election is made, see next slide): A corporation that is taxable (or that would be taxable if subject to tax) under Article 9 (certain utilities) or Article 33 (insurance corporations) An REIT or RIC that is not a captive REIT or a captive RIC A New York S corporation, and An alien corporation that is not treated as a domestic corporation under the Internal Revenue Code and that has no effectively connected income for the taxable year 33

34 Combined Reporting Determining the Combined Group Prior and current law: No election to file combined New law: Corporations may elect to be treated as a combined group Must meet the more-than-50% common ownership test (same ownership as mandatory combined filing) Need not be conducting a unitary business Election Must be made on an original timely filed return Irrevocable for seven taxable years Any corporation entering the commonly owned group while the election is in effect is automatically included in the combined group (regardless of unitariness) Election is automatically renewed for another seven taxable years unless affirmatively revoked Once revoked, a new election is not permitted for any of the three immediately following taxable years 34

35 Combined Reporting Computing the Tax All New York taxpayers will be jointly and severally liable for the tax due on the combined report In computing the tax bases, the combined group is generally treated as a single corporation Capital base is the portion of the combined capital of the combined group that is apportioned to New York In computing combined capital, all intercorporate stockholdings, intercorporate bills, intercorporate notes receivable and payable, intercorporate accounts receivable and payable, and other intercorporate indebtedness are eliminated Business income base is the portion of the combined business income of the combined group that is apportioned to New York, reduced by any net operating loss (NOL) deductions for the group All intercorporate dividends must be eliminated and all other intercorporate transactions are deferred (similar to the rules under 1502 of the Internal Revenue Code) 35

36 Apportionment Overview Current apportionment under Articles 9-A and 32 Article 9-A Article 32 New apportionment provisions 36

37 Apportionment Current Article 9-A Apportionment Current Article 9-A law: A taxpayer s IAP is computed based on the weighted average of the IAP s of the taxpayer s investments (found in a Department publication) A taxpayer s BAP is the ratio of the taxpayer s New York receipts to its total receipts (single sales factor). Generally, New York receipts are from: Sales of tangible personal property shipped or delivered to the taxpayer s customers in New York Sales of services to the extent the services were performed in New York, and Other business receipts to the extent earned in New York 37

38 Apportionment Current Article 32 Apportionment Current Article 32 law: ENI is multiplied by a three-factor formula consisting of the: Double-weighted deposits factor Payroll factor, and Double-weighted receipts factor Taxpayers must source deposits to the extent that those deposits are maintained by the taxpayer at a branch location 38

39 Apportionment New Apportionment Provisions New law: Retains the receipts-only apportionment scheme under Article 9-A Moves from cost of performance sourcing to market-based sourcing Expands the categories of receipts for which sourcing is specifically addressed and provides guidance on how to apply the sourcing rules Hierarchies determine where to assign particular receipts A taxpayer is required to exercise due diligence under each method before rejecting it and moving to the next method in the hierarchy Example: Sourcing digital products (e.g., electronically available games, computer software, audio works, and books) Taxpayer must first source to the location of primary use and then to the location where the digital product is received by the customer How does a taxpayer determine the location of primary use? What if the taxpayer s customer orders a software program that will be used by its employees at several office locations? With respect to location of receipt, it is unclear if this would be determined by the customer s mailing address or some other method There may be several instances where the location of receipt will not be the location at which the customer actually uses the digital products 39

40 Net Operating Losses Overview New Law s Current Year NOL Deduction NOL Deduction for a Combined Group Conversion Subtraction for Prior Year NOLs Conversion Subtraction for Combined Groups 40

41 Net Operating Losses New Current Year NOL Deduction Current law: NOL deduction for Franchise Tax purposes is generally the same as the federal NOL deduction computed pursuant to IRC 172, with some modifications NOLs are computed and carried forward on a pre-apportionment basis, and the NOL deduction is applied on a pre-apportionment basis New law: NOL Deduction computation is decoupled from the federal computation; the NOL is the amount of business loss incurred in a tax year multiplied by the taxpayer s apportionment percentage for that year. Business loss is not defined in the new law but it most likely means the entire net income less investment income and other exempt income as each term is defined in the bill NOLs are computed and carried forward on a post-apportionment basis, and the NOL deduction is applied on a post-apportionment basis New law provides a 20-year carryforward period for NOLs, with NOLs to be deducted on a first in, first out basis New law also allows a taxpayer to carryback the NOL for up to three tax years, but not to any years starting before January 1,

42 Net Operating Losses Combined Group NOLs The NOL Deduction for a combined group is equal to: Amount of combined NOLs that are carried forward to a particular income year with those NOLs determined based on the combined business loss incurred in a particular taxable year Multiplied by the combined apportionment fraction for that year Combined NOL is determined as if the combined group is a single corporation Rules and limitations apply when computing the NOL Deduction on a combined group basis Federal separate return limitation year (SRLY) rules apply when a combined group in an NOL Deduction year differs from the group in the year in which the NOL was generated 42

43 Net Operating Losses Conversion Subtraction Conversion Subtraction provides taxpayers with the ability to reduce taxable business income using NOLs generated (and calculated on a pre-apportionment basis) in years beginning before the new law applies to the taxpayer (i.e., January 1, 2015, for calendar year filers) However, such prior year NOLs are not simply carried forward; they are transmuted from former year-of-deduction apportionment to year-of-generation apportionment, and they are grossed-up to avoid loss of value due to the rate reductions First, the taxpayer determines the amount of NOL carryforward it would have had on the last day of the base year using the current (i.e., 2014) Tax Law, including all limitations applicable under the current law (the unabsorbed NOL ) Next, the taxpayer determines its apportionment percentage (i.e., its BAP) for that base year, again using the current (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer s Franchise Tax report for the base year Third, the taxpayer multiplies the amount of its unabsorbed NOL by its base year BAP and then multiplies that amount by the tax rate that would have applied to the taxpayer in the base year The resulting amount is divided by 6.5 percent ( qualified New York manufacturers use 5.7%; the percentages are the current year business income tax rates). Result of these computations will be called the Conversion Subtraction pool 43

44 Net Operating Losses Conversion Subtraction Amount of a taxpayer s Conversion Subtraction will be a portion of its Conversion Subtraction pool computed above. Applying the Conversion Subtraction and carrying forward any balance: Standard rule is one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted Any unused Conversion Subtraction may be carried forward until tax years beginning on or after January 1, 2036 (unless the two-year election was made) New law provides a one-time election, which must be made on a timely filed return for the tax year beginning on or after January 1, 2015, but before January 1, 2016, to deduct up to half of the Conversion Subtraction pool in each of the first two tax years beginning on or after January 1, 2015 If a taxpayer makes this election, that taxpayer cannot carryforward any unused amount of the Conversion Subtraction beyond that two-year period. Conversion Subtraction must be applied before any post-2014 NOL Deduction is taken (i.e., the deduction for NOLs generated in taxable years beginning on or after January 1, 2015, as discussed below) 44

45 Net Operating Losses Conversion Subtraction New law provides special rules for computing the Conversion Subtraction for combined groups and for taxpayers that were in combined groups in the base year (as described above, this is 2014 for calendar year taxpayers; the last year before the new law would apply to calendar year filers) but that will file separately in 2015 If a taxpayer was properly included in a combined report for the base year and is included in a combined group consisting of the same members in the first year that the new law provisions apply to the group, then the Conversion Subtraction pool will be computed using the group s combined unabsorbed NOL, the group s base year BAP and the group s base year tax rate If a taxpayer was properly included in a combined report for the base year and is included in a combined group consisting of additional members in the first year that the new law provisions apply to the group, then the Conversion Subtraction pool will be computed based on the sum of the Conversion Subtraction pools computed separately for the group and for the additional members (if the additional members were themselves a group or groups, they would compute on a group basis) If a taxpayer was properly included in a combined report for the base year but begins to file separately, its Conversion Subtraction pool will be computed based on the portion the taxpayer contributed to the group s Conversion Subtraction pool Similarly, if a combined group included members in the base year that are no longer included, the group s Conversion Subtraction pool will be computed based on the portion the remaining group members contributed to the group s Conversion Subtraction pool If the taxpayer filed on a separate basis in the base year, but is properly included in a combined group in subsequent years, the group s Conversion Subtraction pool will be increased by any Conversion Subtraction still available to the taxpayer at the time it joins the group 45

46 Credits: Overview Credit Expansions New Credits 46

47 Credits Credit Expansions Qualified New York Manufacturers enjoy several benefits, including lower tax rates Definition of a Qualified New York Manufacturer has been greatly expanded. A corporation (or combined group) qualifies as a Qualified New York Manufacturer by satisfying either of two tests: (I) a two-part receipts and property test, or (II) a two-part employment and property test. Each is discussed on the following slides. For purposes of these tests, keep in mind that employees and property located anywhere in New York State are considered (an early version of the new law limited the scope to Upstate New York only). ** The Department of Taxation and Finance will release guidance on the Qualified New York Manufacturer Credit soon. 47

48 Credits Qualified New York Manufacturer (I) Receipts and Property Test for Qualification; (A) and (B) must both be satisfied. (A) Receipts portion of the test requires that the corporation be principally engaged in manufacturing. Principally engaged in means that during the taxable year, more than 50% of the gross receipts of the taxpayer are derived from the sale of goods produced by the activities listed in the next paragraph. For purposes of determining whether a combined group of corporations qualifies as a manufacturer, the same list of activities is used and the same 50% test is applied, but in computing the group s gross receipts, intercompany transactions are eliminated. Qualifying activities are the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming agriculture, horticulture, floriculture, viticulture, or commercial fishing. Generation and distribution of gas, steam, and electricity are excluded from the definition. Thus, a corporation (or combined group) must receive 50% or more of its gross receipts from sales of goods produced by those qualifying activities. (B) Property portion of the test is satisfied if: (1) corporation has property eligible for the investment tax credit, Property eligible for the investment tax credit includes tangible personal property, buildings and structural components of buildings that are: depreciable; have a useful life of at least four years; are acquired by purchase; are located in New York; and are principally used in the production of goods by manufacturing. and (2) corporation meets either of two additional requirements. (a) adjusted bases of the corporation s New York property (for federal income tax purposes) is at least $1MM measured on the last day of the tax year, or (b) all of the corporation s real and personal property is located in New York. (II) Employment and Property Test for Qualification If a corporation (or combined group) fails the 50% test for being principally engaged in manufacturing (above), it can still be a Qualified New York Manufacturer if the corporation (or its combined group) employs at least 2,500 employees in manufacturing and the corporation (or its combined group) have manufacturing property in New York worth at least $100MM. ** The Department of Taxation and Finance has indicated that it release guidance on the Qualified New York Manufacturer incentive 48

49 Credits New Credits Under new law, qualified New York manufacturers are eligible to claim a refundable tax credit under the Franchise Tax (or the personal income tax) equal to 20% of such manufacturer s real property tax paid on property owned, or under certain circumstances leased, by such taxpayer and used for manufacturing in New York (as of January 1, 2014) A credit is not allowed for property taxes deducted in the computation of business income or in the computation of another credit claimed by the taxpayer New law provides a refundable credit for telecommunications excise taxes paid by START-UP New York businesses, beginning on or after January 1, 2014, START-UP New York Program already exempts businesses involved in the program from almost every type of New York tax Current public messaging surrounding the program touts 100 percent tax-free operations for qualified businesses. However, those businesses are not technically exempt from all New York taxes. Example: New York s telecommunications excise tax is imposed on all taxpayers and is customarily passed through to the taxpayer s customers, which could include START-UP New York businesses This new credit eliminates the remaining tax that is borne by START-UP New York businesses 49

50 Questions/Comments Leah Robinson Partner Sutherland Asbill & Brennan LLP (212) Marc Simonetti Partner Sutherland Asbill & Brennan LLP (212)