Before 2015, investment income in New York was subject to tax, and all income from subsidiaries was exempt. As of January 2015, income tax is imposed only on business income. Business income is entire net income (ENI) less investment income and other exempt income. Investment income is defined as income from investment capital. Other exempt income includes exempt controlled foreign corporation (CFC) income and exempt unitary corporation dividends.
These tax-exempt income items, however, must be reduced by any interest deductions directly or indirectly attributable to that income. The exemption for investment income, after reduction for the interest deduction, cannot exceed 8 percent of ENI. Any excess will be included in business income. Technical Memorandum TSB-M-15(8)C (TSB) issued Dec. 31, 2015, specifically provides the methodology for the attribution of interest deduction and explains the 40 percent safe harbor election.
Direct and Indirect Attribution of Interest Deductions
The TSB provides taxpayers with two options to compute the interest allocable to investment income and other exempt income:
- A four-step procedure for computing allocable direct and indirect interest expense
- A 40 percent safe harbor election
The four-step procedure involves: 1) identifying the total amount of interest deductions subject to attribution, 2) determining direct attribution, 3) determining indirect attribution, and 4) reporting interest deductions attributable. When a particular interest deduction is directly attributable to more than one type of income, the taxpayer may apportion the interest expense with any reasonable method. Any remaining interest deduction is subject to indirect attribution. The TSB provides ratios to determine the indirect attribution amount for investment capital, exempt CFC income, and exempt unitary corporation dividends.
In lieu of interest attribution, taxpayers may elect to reduce the amount of investment income, exempt CFC income, and exempt unitary corporation dividends by 40 percent. The safe harbor election does not apply to exempt cross-article dividends, a subcategory of exempt unitary corporation dividends.