Significant Changes Arising From the New York State 2022-2023 Budget Bill
On April 9, 2022, the Governor of New York, Kathy Hochul, signed the State’s 2022-2023 fiscal year budget into law. This legislation, as well as subsequent bills, has significant changes to the New York State (NYS) Pass-Through Entity Tax (PTET), creates a New York City (NYC) PTET and provides both corporate and personal income tax modifications. The following highlights the most impactful changes:
Updates to NYS Pass-Through Entity Tax (PTET)
Election Due Date
NYS Senate Bill number S8948, which was signed into law on May 6, 2022, amends the aforementioned budget bill allowing eligible partnerships and S Corporations that failed to make the PTET election by the March 15, 2022, deadline to now have until September 15, 2022, to make the election for the 2022 tax year.
Changes for S Corporations
The NYS budget bill amends NYS tax law section 860, Definitions, providing for two separate S Corporation classifications for NYS PTET calculation purposes; “Electing standard S corporation” and “Electing resident S corporation.”
The Electing standard S corporation classification is electing an S corporation that is not an electing resident S corporation. There are no changes to the way PTET is calculated for electing standard S corporations, it remains based solely on the S corporation’s NYS source income only.
An Electing resident S corporation classification is electing an S corporation that certifies at the time of its annual PTET election (for 2022, this election is due by March 15, 2023) that all its shareholders are NYS residents (the state will need to issue guidance on how this election is to be made). This election is irrevocable for that tax year. For this new classification of S corporation, PTET will be calculated based on the sum of all items of income, gain, loss or deduction to the extent they are included in the taxable income of a shareholder. These S corporations will no longer be limited to NYS sourced income when it comes to calculating PTET, resulting in larger PTET income, which will increase federal tax savings. The following example illustrates the difference between the previous law and the amended law:
S corporation A has all NYS resident shareholders and has $1 million of federal taxable income for 2022, $500,000 of which is NYS sourced. Under the previous law, A would have $500,000 of PTET income which would result in a tax and credit of $34,250. Under the new legislation, A’s PTET income would be $1,000,000, resulting in a tax and credit of $68,500.
This new calculation for resident S corporations will not only increase federal tax savings due to the larger tax payments required but will also help alleviate the shareholder’s NYS tax burden. Previously, S corporation shareholders were only receiving a credit based on their NYS sourced income at the company level but were being taxed on 100% of the income from that activity. With this modification, shareholders of resident S corporations will receive a credit based on 100% of the income they are required to pay tax on in NYS, essentially covering the tax due for that activity in whole.
Individual Tax Updates
Student Loan Forgiveness
Effective for the tax year 2022, Tax Law 612 (c)(46) was amended to add a deduction for any student loan forgiveness award to the extent that it is included in federal adjusted gross income (AGI).
Business Tax Credits
COVID-19 Capital Costs Tax Credit Program
The new budget creates a new refundable tax credit program for small businesses for COVID-19 related expenses. The credit is equal to 50% of qualifying COVID-19 capital costs, up to $25,000. Eligible costs include, but are not limited to: (i) costs for supplies to disinfect and/or protect against COVID-19 transmission, (ii) physical barriers and sneeze guards, (iii) hand sanitizer stations, (iv) respiratory devices such as air purifier systems installed at the business location, (v) signage related to the COVID-19 pandemic, (vi) materials required to define and/or protect space such as barriers, (vii) certain point of sale payment equipment to allow for contactless payment, (viii) building construction and retrofits to accommodate social distancing, (ix) machinery and equipment to accommodate contactless sales, (x) materials to accommodate increased outdoor activity.
To be eligible for the credit, the expenses mentioned above must be paid between January 1, 2021, and December 31, 2022, and the company must meet the following criteria: (i) must be a small business and have less than $2,500,000 of gross receipts for 2021, (ii) must operate a business in NYS, and (iii) must have at least $2,000 in qualifying COVID-19 capital costs.
Applications, when available, must be submitted to the Department of Economic Development by March 31, 2023. The credits cap once there has been $250 million awarded across the state.
Contributing author: John F. Martin, CPA/PFS, CFP®, is a tax partner at Dannible & McKee, LLP. John has over over 33 combined years of experience providing tax compliance and consulting services to a variety of clients including multi-national corporations, closely-held companies and individuals. For more information on this topic, you may contact John at firstname.lastname@example.org or (315) 472-9127.