GMG Knowledge Base

Salt Spotlight
15 Apr, 2014

New York State Corporate Reform Enacted

Posted by Grant McCarthy Group on Apr 15, 2014 3:09:00 PM

Knowledge Base

 On March 31, 2014, New York Governor Andrew Cuomo signed the State’s budget legislation which, among other things, makes significant changes to the State’s corporate income tax laws, including the repeal of the Article 32 Franchise Tax on banking corporations (“Bank Tax”).  Taxpayers previously subject to such tax are now subject to tax under Article 9-A.  In addition to repealing the Bank Tax, the new legislation makes significant changes to Article 9-A, including adopting new economic nexus rules, modifying the net income and capital tax bases, adopting a market-based approach for apportioning receipts, modifying the net operating loss (“NOL”) deduction and carryover rules, and revising the combined reporting rules.  Most of these changes are effective for taxable years beginning on or after January 1, 2015.  To date, New York City has not adopted similar provisions, resulting in vastly different taxing regimes in the State and City.    

Nexus - General Rules

Under the new law, a corporation is subject to tax in New York State if it has $1 million or more of New York receipts.  New York receipts are determined with reference to the new apportionment rules which adopt a market-based approach.  Thus, certain types of corporations (e.g., sellers of digital products, service providers, and lenders) may now find themselves subject to New York tax as a result of the interplay between the newly enacted economic nexus standard and the market-based sourcing of receipts.

The new law retains the existing Bank Tax rule that a credit card corporation is considered to be doing business in the State if it issues credit cards to 1,000 or more customers with New York mailing addresses, or has contracts with 1,000 or more merchants located in the State (or a combination of customers and merchants). 

The new law also expands the nexus provisions for corporate partners of limited partnerships by eliminating some of the exemptions under current law.  Under the new rules, a corporation that is a partner in a partnership that is doing business, employing capital, owning or leasing property, maintaining an office or deriving receipts from activities in the State (defined under the new economic nexus provisions) is subject to tax. 

Finally, the new law eliminates the exemption from tax where a corporation’s only connection to the State is the ownership of inventory held at the location of an unrelated fulfillment company located in New York.

Nexus - Special Rules Relating to Combined Reporting Groups

The new law also contains special rules for members of combined reporting groups with more than $10,000 but less than $1 million in New York receipts, and credit card corporations with more than 10 but less than 1,000 New York customers/contracts.

Corporations are subject to the fixed dollar minimum tax if: (a) they have more than $10,000 but  less than $1 million of  New York receipts; (b) are part of a combined reporting group; and (c)  the New York receipts of combined group members having at least $10,000 of New York receipts, in the aggregate, meet the million dollar threshold.    

A credit card corporation with less than 1,000 New York customers/contracts will be deemed to be doing business in the State if it:  (a) has at least 10 New York customers or contracts with 10 New York merchants (or a combination of the two); (b)  is part of a combined reporting group; and (c) the number of customers/contracts of the members of the combined reporting group having at least 10 customers/contracts in the State in the aggregate meets the 1,000 threshold. 

Modifications to the Tax Rates and Bases

Beginning in 2015, taxpayers will be subject to tax on the highest of the taxes computed under the business income, business capital or fixed dollar minimum tax base.  The minimum taxable income base and the tax on subsidiary capital have been repealed.  

The new legislation reduces the business income tax rate from 7.1% to 6.5% for years beginning on or after January 1, 2016 (zero for qualified New York manufacturers beginning in 2014), increases the maximum tax on capital from $1 million to $5 million for non-manufacturers (but gradually phases-out the tax for years after 2020), and increases the fixed dollar minimum tax for taxpayers with New York receipts over $1 billion to $200,000. 

Business Income Tax Base

The legislation makes significant changes to the entire net income tax base.  Currently, the computation of entire net income begins with federal taxable income for domestic corporations and worldwide income for alien corporations.  Beginning in 2015, the starting point for computing entire net income of alien corporations will be income effectively connected with a US trade or business as defined under IRC Sec. 882 (subject to certain modifications).

Under the new legislation income will be assigned to one of three categories: business income, investment income and other exempt income. Business income will continue to be allocated by the business allocation percentage. Investment income and other exempt income will not be taxed. 

 Business Income

Under the new legislation, “business income” is defined as entire net income, less the sum of (i) investment income; and (ii) other exempt income. 

 Investment Income 

Investment income is defined as income (including capital gains in excess of capital losses) from investment capital.   The new law has narrowed the definition of investment capital.  Beginning in 2015, investment capital will include only investments in the stock of a corporation held for more than 6 months and not sold in the regular course of business.  Investment capital does not include stock of a corporation that is part of the taxpayer’s unitary business or included in a combined report with the taxpayer under the “common ownership election” (discussed below).  A corporation will be presumed to be non-unitary with a taxpayer owning less than 20% of the corporation’s stock.  The new law also provides that income or gain from a debt obligation or other security that cannot be apportioned to NY under the US Constitution will be treated as exempt investment income.

Investment income must be reduced by the taxpayer’s loss, deduction and/or expense attributable to hedging transactions entered into to manage the risk of price changes or currency fluctuations with respect to any item of investment capital if all the risk (or all but a de minimis amount of the risk) is related to such investment capital.  If such expenses exceed investment income, the difference is added back to business income.

GMG Observation:  The good news is that income from investment capital is exempt from tax under the new law. The bad news is that the new law narrows the definition of investment capital such that investment income will generally include only capital gains and dividends received from non-unitary corporations. Notably, the new definition of investment capital does not include investments in bonds and other corporate and governmental securities, and the cash election existing under current law is repealed.  Income from such instruments will be taxed as business income. 

 Other Exempt Income

Other exempt income is defined as the sum of “exempt CFC income” and “exempt unitary corporation dividends.”   Exempt CFC income is IRC Subpart F income received from a unitary corporation, and exempt unitary corporate dividends are dividends received from unitary corporations that are not included in the taxpayer’s combined return (e.g., dividends from Article 9 or 33 companies or alien corporations (including CFCs) that are not included in the combined report). 

 Attribution of Interest Expenses

Taxpayers are required to reduce both investment income and other exempt income by interest expenses directly or indirectly attributable to such income.  If the amount of interest expense attributable to each class of income exceeds such income, the difference must be added back to business income. 

In lieu of attribution, taxpayers may annually elect to reduce investment income and other exempt income by 40%.  This election is not available for dividends received from taxpayers subject to (or that would be subject to) Articles 9 or 33.  Otherwise, this election must be made for all exempt income; it may not be made for only one category of income.  The election applies to all members of a combined group.  

GMG Observation:  Under current law, both interest and non-interest expenses are subject to attribution.  Under the new law, only interest expense is subject to attribution; thus, all non-interest expenses will reduce business income.  It is unclear what methodology should be used to attribute interest expenses, but it is likely that existing procedures for attributing interest should be utilized.

Business Capital Base

Under the new law, business capital is defined as all assets less investment capital.  Accordingly, stock currently treated as subsidiary capital will be taxable as business capital.  While the maximum tax on capital is increased to $5 million for most taxpayers (but remains at $350,000 for qualified New York manufacturers), the capital tax is scheduled to be completely phased out for tax years beginning in 2021.

GMG Observation:  While investment and subsidiary capital are no longer taxable, many taxpayers will see an increase in their capital tax base as a result of the inclusion of stock in subsidiary corporations.


The new legislation retains the single sales factor apportionment formula, which now applies to both financial corporations and general business corporations in the same manner.  The legislation adopts a market-based approach for sourcing receipts, and expands the types of receipts for which specific sourcing rules exist.  Most notably, the new law adopts a hierarchical approach in sourcing receipts from the sale of digital products.  In addition, while the law retains the “catchall” provisions regarding receipts from “other services” and “other business receipts,” the new rules require both types of receipts to be sourced using a similar hierarchical approach.  

The new legislation also provides specific rules for sourcing receipts from various financial transactions.  These rules similarly adopt a market-based approach, but also incorporate an “8% rule,” which requires 8% of the receipts from certain financial instruments sold through a securities broker/dealer or through a licensed exchange to be included in the numerator of the apportionment factor. 

Finally, as under the current law, the new law gives the Commissioner discretion to apply a different apportionment formula when the standard formula does not result in a proper reflection of the taxpayer’s business or capital in the State. 

GMG Observation: New York joins a long list of states in moving to market based sourcing of receipts. Taxpayers, particularly those selling services or digital products, should pay careful attention to the new rules and hierarchies as apportionment may shift dramatically for these taxpayers under the new rules.  In addition, although the new law is an attempt to simplify New York’s apportionment rules, the application of the new hierarchical approach adopted by the State may nonetheless result in additional controversy. 

Net Operating Loss Deduction

Currently, the New York net operating deduction is subject to a number of limitations, most notably a prohibition against deducting a New York NOL that is greater than the deduction allowed for federal purposes.  Under the new legislation, taxpayers compute their NOL deductions without reference to the federal deduction.  In addition, taxpayers will compute their net operating loss carryover on a post-apportioned basis by multiplying the current year loss by the business allocation percentage applicable for that year.  

In tax years beginning in 2015, taxpayers will not be permitted to deduct any loss incurred in any year prior to 2015, or any year in which the taxpayer was not subject to New York tax. In recognition of the financial statement impact of these changes, the State has developed rules for allowing taxpayers to deduct net operating losses generated in years prior to the effective date of the legislation.   In addition to any net operating losses generated in 2015 and subsequent years, the new legislation allows taxpayers to claim a net operating loss conversion subtraction (“NOLCS”).  The NOLCS is determined by multiplying a taxpayer’s net operating losses available on the last day of the base year (generally 2014 for calendar year taxpayers) by the base year apportionment percentage and tax rate.  The result is then divided by 6.5% (or 5.7% for qualified NY manufacturers) to arrive at the total pool of NOLCS that may be subtracted in future years.   Taxpayers may claim up to one tenth of the NOLCS each year (against post-apportioned business income).  The NOLCS cannot reduce the tax on business income lower than the higher of either the tax on business capital tax or the fixed dollar minimum tax.  Any NOLCS that would have been claimed, but for this limitation, is not subject to the one tenth limitation.  The NOLCS must be applied before any net operating loss deduction may be claimed, and may be carried forward through the end of 2035.  

In lieu of claiming one tenth of the NOLCS each year, taxpayers may elect to claim, by the due date of the return (without regard to extension), one half of the NOLCS in 2015 and 2016 (for calendar year taxpayers).  If the election is made, any remaining NOLCS cannot be carried forward.  

Combined groups generally compute the NOLCS in the same manner, and are permitted to use the combined group’s net operating losses available on the last day of the base year to compute the NOLCS pool.  (Note that State has adopted rules that apply when the makeup of the combined group varies from the base year to the year the NOLCS is claimed.)  

GMG Observations:  Under existing law, the New York NOL deduction is limited to the amount allowed for federal income tax purposes.  By eliminating that limitation, the new law greatly simplifies and rationalizes the calculation of New York NOLs.  Taxpayers should begin to evaluate whether it is beneficial to claim the NOLCS over two or ten years.

MTA Surcharge

The temporary MTA surcharge will become permanent under the new law, and applies based on the new economic nexus rules.  In addition, for years beginning on or after January 1, 2015 but beforeJanuary 1, 2016, the tax rate is 25.6% of the tax imposed under Sec. 209, before the application of any credits.  Thereafter, the tax rate is to be determined by the Commissioner.   The surcharge continues to be apportioned using a three-factor formula.  

Combined Reporting

For years beginning on or after January 1, 2015, a combined return will be required for any group if the ownership and unitary business requirements are satisfied.  The ownership test is met if a corporation owns more than 50% of the voting power of capital stock of another corporation.   While there is no definition of unitary business in the new law, it is likely that current definitions existing in federal and New York case law and regulations will apply.  The new rules eliminate the uncertainty in applying the substantial inter-corporate transactions and distortion requirements contained in the prior law.

The new law also changes the composition of the combined group.  In a departure from the current rules, an alien corporation with effectively connected income (or one that is treated as a domestic company under the IRC), which meets the ownership and unitary business requirements, must also be included in a combined return.   Companies that are taxed under either Articles 9 or 33, or Subchapter S corporations, are not permitted to be included in an Article 9-A combined return.   Finally, a corporation that is subject to tax solely as a result of owning a limited partnership interest in a limited partnership doing business in New York is not required to be included in a combined return if its related corporations are not themselves New York taxpayers.   The legislation does not address whether a corporation that is unitary with an excludable corporation is otherwise required to be included in a combined return. 

In computing tax in a combined report, the combined group will be treated as a single taxpayer, inter-corporate dividends are eliminated in the computation of combined income (note that dividends paid by captive REITs and RICs do not qualify for a dividends paid deduction), and inter-corporate stock holdings, bills, notes receivables/payables, accounts receivable/payable and other inter-corporate indebtedness are eliminated in computing combined capital.  In addition, intercompany transactions are deferred and treated in the same manner as under the federal IRC Sec. 1502 rules.   Finally, while combined group members must separately qualify for credits, once qualified, the credits may be used to offset combined group income.   

Combined tax is based on the higher of the business income tax, capital tax, or the fixed dollar minimum tax for the designated agent (generally, the parent company) of the combined group.  As under current law, combined tax also includes the fixed dollar minimum tax for all group members that are NY taxpayers.   As discussed above, the new economic nexus rules may result in a higher fixed dollar minimum tax for combined groups if certain members are considered to have nexus with NY after the new law takes effect. 

Election to File on a Combined Basis

The new law permits commonly controlled groups (ownership of greater than 50% of the voting power of capital stock) to elect to file on a combined basis, regardless of whether group members are part of a unitary business.  The election must be made on an originally filed return, is irrevocable for 7 years, and will include any members entering the group after the election is made.  The election is automatically renewed for another 7 years unless the taxpayer revokes the election on an originally filed return, and if the election is revoked, it may not be made again for another 3 years. 

GMG Observations:  Under current law, corporations that are part of a unitary business are required to file on a combined basis if they meet the ownership requirement (80% or more common ownership of capital stock) and either have substantial inter-corporate transactions with other group members, or if filing separately would otherwise distort business income or capital in New York (i.e., the “distortion” requirement).  Both the “substantial inter-corporate transactions” and “distortion” tests have been the subject of much controversy.  The bright line test adopted by the new legislation should result in greater clarity and less controversy regarding the composition of combined groups.

In preparation for the law changes, New York taxpayers should estimate their tax liabilities under the provisions of the new law and determine whether they are required to file on a combined basis in the State.  They should also consider whether it would be beneficial to make the election to file on a combined basis including all corporations under common control.


The new legislation is likely to present significant challenges to New York corporate taxpayers.  Many taxpayers will face additional compliance burdens if New York City does not adopt similar rules, particularly those regarding the computation of the tax bases or net operating loss deductions.