New York State Enacts Fiscal 2023-2024 Budget

New York State Enacts Fiscal 2023-2024 Budget

On May 3, Gov. Kathy Hochul signed A3009/S4009 and A3008/S4008 (collectively, the Fiscal 2023-2024 Budget), ending lengthy budget negotiations between her office and the state legislature.

The budget, estimated at approximately $229 billion for this fiscal period, includes items ranging from tax policy to social policy and, as such, is annually the most comprehensive legislation in New York State.

This alert summarizes some of the changes to New York tax policy included in the Fiscal 2023-2024 Budget.

Corporate Tax

New York State Income/Franchise Tax

The Budget extends the increased temporary article 9A tax rate of 7.25% for three more years to tax years ending before January 1, 2027, for those with business income tax bases over $5 million. Corporations below that threshold are subject to the previous rate of 6.5%, rather than 7.25%.

The legislation also extends the capital base tax rate of 0.1875% for tax years ending before January 1, 2027; the rate will decrease to 0% for tax years starting on or after January 1, 2027.

Notably, the legislation did not include a proposal to eliminate the separate New York S corporation election and generally require federal S corporations to report income with the state as New York S corporations.

Metropolitan Transportation Business Tax Surcharge

The state imposes a metropolitan transportation business tax surcharge on the franchise tax liabilities of corporations doing business in the metropolitan commuter transportation district – that is, Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, and Westchester counties. The legislation repeals the requirement that the commissioner annually set the surcharge tax rate and makes permanent the current rate of 30% for tax years that begin on or after January 1, 2024.

Real Property Transfer Taxes for REITs

The Budget extends the reduced real estate transfer tax rates in New York State and New York City (NYC) for qualifying real estate investment trusts from September 1, 2023, to September 1, 2026. For any real estate investment transfer, the legislation reduces the tax imposed by New York State to $1 for each $500, or part thereof, of consideration, giving taxpayers more time to make some reduced tax conveyances involving REITs.

Pass-Through Entity Tax (PTET) Election

For New York State and City pass-through entities (PTEs) making the PTET election, the legislation excludes from the definition of PTE taxable income any PTETs or similar taxes paid to other jurisdictions and deducted for federal income tax purposes. That change codifies guidance from the Department of Taxation and Finance.

For the NYC PTET, the Budget expands the definition of a city taxpayer to include city resident trusts and estates. Any taxpayer that filed based on the understanding that this was the intent of the original PTET legislation will be protected. However, the Department has issued guidance in the past to provide similar clarification, making it unlikely that it will allow retroactive PTE elections for taxpayers that missed the annual deadline.

MCTMT/Payroll Tax

The legislation amends the definition of the term “net earnings from self-employment” for applying the metropolitan commuter transportation mobility tax (MCTMT), which is imposed on some employers and self-employed individuals engaging in business in the metropolitan commuter transportation district. Generally, the MCTMT does not apply to limited partners, but the Department has asserted during audits that the formal title of “limited partner” does not shield individuals from the tax. The Budget codifies the Department’s position, providing that the Department will not consider an individual a limited partner for MCTMT purposes if the individual directly or indirectly takes part in the control of, or participates in, the management or operations of the partnership such that the individual is not a passive investor, despite the individual’s title or characterization in the partnership or operating agreement.

The legislation also increases the top MCTMT rate from 0.34% to 0.6% for employers engaged in business in NYC, effective July 1. In addition to the payroll tax increase, the governor has proposed using casino licensing fees to help support the Metropolitan Transportation Authority.

Credits and Incentives

The Budget also made several changes to corporate franchise tax credits by:

  • Creating an employer-based childcare credit.
  • Extending the NYC biotech credit.
  • Extending the rehabilitation of historic properties credit.
  • Extending the Empire State production tax credit.
  • Extending the grade number 6 heating oil conversion credit.
  • Extending the COVID-19 capital costs tax credit.
  • Extending the NYC musical and theatrical production credit and extending and expanding the New York State film credit.
  • Expanding the investment tax credit for farmers.
  • Extending the alcoholic beverage production credit.
  • Funding additional excelsior tax credits.

Sales and Use Taxes

The legislation extends the sales tax exemption for some food and drink items from May 31, 2023, to May 31, 2024.

Tax Appeals Process

The legislation grants the Department the right to appeal some decisions from the Tax Appeals Tribunal, previously a right enjoyed only by taxpayers. The Department can appeal decisions based on interpretations of the state or federal constitution, international and federal law, the laws of other states, or other legal matters beyond the purview of the state legislature.

BDO Insights

  • The business income tax rate increase from 6.5% to 7.25%, which has generated $3.4 billion in revenue thus far, was originally meant to be temporary. Businesses should consider the impact the extension could have on ASC 740 and estimated taxes.
  • Individual partners classified as limited partners should consider whether the MCTMT may apply to their net earnings from self-employment based on the substance of their involvement with the partnership, rather than their formal titles. Partners who participate in the management or operations of the partnership remain subject to the MCTMT because they are not considered limited partners.