Corporations doing business in New York face a new tax landscape in 2015 as a result of last year’s corporate tax reform legislation. Corporate taxpayers need to consider the following changes and some important elections when calculating their 2015 estimated payments.
Economic Nexus Provisions
Out-of-state businesses will be presumed to be doing business in New York and subject to tax if they have $1 million of receipts from New York customers. Even if an out-of-state business can claim the protection of Public Law 86-272 to avoid the imposition of the income tax, it still will be subject to the minimum tax on capital or the fixed-dollar minimum tax.
Receipts from sales now are sourced using a market-based approach. This change primarily will affect service businesses. Before the change, service receipts were attributable to New York under a modified cost-of-performance test, which assigned receipts based on where the work was performed as opposed to the customer’s location.
New York also gives taxpayers with receipts from qualified financial instruments two options for apportionment. Qualified financial instruments include any financial instrument that is marked to market under IRC Section 475 or 1256, excluding loans secured by real property. Taxpayers can elect either to source 8 percent of qualified financial instrument income to New York or to use the standard apportionment rules. This is an annual election that must be made on an original, timely filed tax return.
Net Operating Losses
NOL carryforwards now are computed on a post-apportionment basis (based on a taxpayer’s New York apportionment percentage in the year that the NOL is generated). Previously, NOLs were computed on a pre-apportionment basis, and the benefit of the NOLs was based on the taxpayer’s NY apportionment percentage during the year that they were used. Under the new law, there are now two categories of NOL carryforwards:
- NOL carryforwards for losses generated for tax years beginning on or after Jan. 1, 2015
- NOL carryforwards from years prior to 2015, which must be recomputed at the end of 2014 in a multistep process to take into account the changes in the law
After conversion, using pre-2015 NOLs is limited to 10 percent annually of the converted NOL, with unused amounts carried forward up to 20 years. Taxpayers with pre-2015 NOLs can make an irrevocable election to use 50 percent of their converted NOLs in 2015 and the remaining 50 percent in 2016. If this election is made, any unused portion of the converted NOL not used in 2015 or 2016 is forfeited. Because of the use-it-or-lose-it nature of the election, businesses should pay particular attention to their 2015 and 2016 taxable income projections.
Investment Income and Other Exempt Income
There is a new category of income that is exempt from tax that includes the sum of controlled foreign corporation (CFC) income and corporate dividends. The portion of a taxpayer’s interest expense allocable to exempt income is disallowed. In lieu of a detailed computation of the interest expense disallowance, taxpayers can make an annual election to pay tax on 40 percent of their exempt investment income.
Combined Filing Rules
A unitary water’s edge filing, which includes certain foreign affiliates doing business in the United States, replaces the previous combined filing that was based on a substantial intercorporate transactions test. In addition, businesses now can elect to file a combined return, which includes all 50 percent owned domestic subsidiaries and certain foreign affiliates with U.S. income, even if the affiliated entities are not unitary. Once elected, the group of taxpayers must file combined for the current year and six subsequent tax years.
Exemption for Qualified New York Manufacturers and NOL Implications
Effective for years beginning on or after Jan. 1, 2014, the tax rate on income for qualified New York manufacturers is reduced from 5.9 percent to zero. While the exemption is beneficial for most businesses that qualify, qualified New York manufacturers with NOLs may have an unpleasant surprise. The mechanics of the multistep process necessary to convert pre-2015 NOLs to post-2015 NOLs could effectively wipe out the value of the NOLs, leaving no benefit available in 2015 and future years.