New York Legislature Advances Bill to Drop Virus Tax Breaks for NYC

May 27, 2020, 10:55 PM

New York state legislators are seeking to make sure a batch of pandemic-related business tax breaks passed by Congress in March won’t apply to New York City income tax laws.

The state was the first to opt out of the coronavirus rescue package known as the CARES Act as a means of coping with revenue losses from the pandemic when it acted in April to block from state and city taxes the expanded deductibility of interest payments. A new bill (A10519/S8411) is moving quickly through a truncated remote legislative session that would further decouple city tax laws from the CARES Act.

More states are expected to follow New York’s lead as they try to balance their pressing revenue needs against the business relief provided by the federal stimulus law. Under the pending state bill, four more CARES Act tax breaks would be ruled out for the city’s corporate business tax, general business tax, unincorporated business tax, or bank tax.

Sponsors said that the federal stimulus tax breaks they’re targeting would cost the city $75 million in revenue over the next two fiscal years. The city, facing a potential revenue gap of $5.4 billion in the fiscal year that starts July 1, “cannot afford to lose these millions of dollars in revenue at this time,” they said in a memorandum submitted with the bill.

The decoupling proposal got approval from the full State Senate 41-21 and Assembly 110-34 Wednesday, after sailing through virtual committee approvals in both houses earlier in the day. Under decoupling, a state can act to reject federal tax provisions that would normally be adopted automatically through a federal-state conformity process. The New York City tax system is governed by state law. The bill won’t become law until it’s approved by Gov. Andrew M. Cuomo (D).

NOLs, Excess Business Losses

The bill would drop changes to tax code Section 172 that allow unincorporated businesses and S corporations to use net operating losses to offset up to 100% of taxable income and give them greater ability to carry over or carry back those losses to other tax years.

It would eliminate CARES Act changes to tax code Section 461(l) that allow noncorporate taxpayers to deduct excess business losses against other types of income.

The bill would also take up unfinished work concerning the CARES Act’s expansion of the business interest expense deduction under tax code Section 163(j), which was the target of the April action by New York lawmakers.

To be newly struck from the city tax laws would be Section 163(j)(10)(A)(ii), which allows greater deduction of interest payments for members of a partnership, and Section 163(j)(10)(B), which permits business taxpayers to use 2019 income instead of income in any subsequent taxable year to calculate the allowable interest expense deduction.

The Legislature’s April decoupling action covered Section 163(j)(10)(A), but not those two related provisions, which allow members of partnerships to take the expanded deduction and give business taxpayers a benefit if they had higher income in 2019—before the pandemic shutdown—than in subsequent years.

—With assistance from Keshia Clukey in Albany, N.Y.

To contact the reporter on this story: John Herzfeld in New York at jherzfeld@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com

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