New York Tax Cut Legislation Expands SALT Cap Workaround and Extends PTET Election Deadline by Six Months

New York is the latest state to provide tax reductions to business and individual taxpayers. New York’s recently passed $221 billion Fiscal Year 2023 budget expands the benefits of the state’s workaround of the $10,000 federal cap on state and local tax (SALT) deductions and provides a number of tax breaks for both individuals and businesses. The record budget does not include any tax increases, as the state has a budget surplus and projects balanced budgets through 2027.

Expansion of SALT Cap Workaround

The legislation expands the state’s SALT cap workaround by allowing for two classes of S corporations: electing standard S corporations and electing resident S corporations. An S corporation is an electing standard S corporation unless it becomes an electing resident S corporations by making an irrevocable certification that all shareholders are residents at the time of the election. In separate legislation, the state extended the election deadline from March 15, 2022 to September 15, 2022.

Previously, S corporations could include only New York source income in the taxable income of the tax base for the pass-through entity tax (PTET). The state’s market-sourcing apportionment rules made New York source income low for many businesses, limiting the benefit of the PTET for S corporations with both resident and nonresident shareholders and single shareholder S corporations.

Tax Cuts for Businesses and Individuals

The budget legislation also includes a number of tax breaks for both individuals and businesses.

Key provisions for business:

New small business COVID capital costs tax credit: The budget includes a new refundable tax relief program for capital investments related to COVID-19 for businesses with less than $2.5 million in revenue. The 50 percent credit has a total limit of $25,000,

Reduced taxable income for small businesses: The budget reduces taxable net income for small businesses by increasing the small business subtraction modification of net business income or net farm income from 5 percent to 15 percent. The subtraction modification applies to sole proprietorships with one or more employees and net incomes of less than $250,000, certain pass-through entities with farm income of less than $250,000, and has been expanded to apply to certain pass-through entities with non-farm income of less than $1.5 million sourced to New York. This change takes effect beginning in 2022.

Cannabis business tax deductions: The bill allows cannabis companies to make tax deductions that are otherwise prohibited at the federal level by IRC Section 280E.

Expanded tax credits for farmers: The budget expands the Investment Tax Credit for farmers and provides a $1,200 credit for farm workforce retention. It also provides an overtime credit to cover expenses due to the decrease in the overtime threshold below 60 hours.

Key provisions for individuals:

Accelerated personal income tax reduction: The budget accelerates a scheduled reduction in personal income tax rates for married-filing-jointly taxpayers earning less than $323,200 for tax years beginning in 2023. New York originally planned to reduce personal income tax rates from 2018 to 2025.

Homeowner tax rebate: The budget also provides a new property tax credit for eligible residents that earn less than $250,000 per year.

Suspension of state fuel tax: The budget also suspends the state’s 16 cents-a-gallon fuel taxes from June through December 2022.

Geothermal tax credit: The budget establishes a tax credit of up to 25 percent, with a limit of $5,000, for five years for the purchase and installation of residential geothermal energy systems.

Student loan forgiveness deduction: The bill provides that any student loan forgiveness award included in federal adjusted gross income will be deducted when calculating New York adjusted gross income.

Weaver can assist in determining how these changes affect your overall tax expense for 2022 and beyond. Contact us today.

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