New York’s Decoupling from CARES Act has Broad Impact
By John Kostenbauder, Harold Hecht and Seth Rabe
April 30, 2020
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that was signed into law March 27, 2020 included many taxpayer-friendly amendments to the Internal Revenue Code (“IRC”) affecting both corporations and individuals. New York recently became the first state to address some of the changes enacted by the CARES Act. Governor Cuomo signed New York’s 2020-2021 budget which impacts the New York State Corporate Franchise Tax and Individual Income Tax as well as the New York City General Corporation Tax (“GCT”), Unincorporated Business Tax (“UBT”), and Personal Income Tax on Residents. The budget includes tax provisions that decouple New York’s law from certain federal income tax law.
NYS Corporate Franchise Tax/NYC GCT and UBT
The CARES Act increased the interest expense limitation from 30% of adjusted taxable income (ATI) to 50%. New York has now decoupled from the increase to the IRC 163(j) interest expense deduction limitation for tax years 2019 and 2020. This means a separate calculation is necessary to apply the 30% adjusted taxable income (“ATI”) for NYS/NYC filings instead of the federal 50% limitation.
NYS and NYC Individual income tax
NYS and NYC have decoupled from all CARES Act provisions for taxable years beginning before January 1, 2022. While NYS is a “rolling conformity” state, meaning any changes to the IRC are automatically incorporated into the NYS tax code, the effect of the budget is to decouple from all provisions of the CARES Act and to fix the individual NYS/NYC statute to the IRC as of March 1, 2020. This includes the following:
- IRC 461(l) excess business loss limitation deferral is not adopted. The excess business loss limitation came into law at the federal level in 2018 and generally allowed a business loss up to $500,000 (for taxpayers married filing jointly) against other types of income. Such a limitation will continue to apply for NYS/NYC individual income tax purposes.
- Net operating loss (“NOL”) carryback limitations. NYS/NYC has no specific statutory provisions concerning individual NOL carryovers and carrybacks. The New York NOLs for residents were always predicated on a federal NOL being allowed. It is uncertain how the de-coupling will impact New York NOLs at this time.
- 60-day rollover of coronavirus-related retirement plan distributions. While federal tax law now allows individuals a three-year period to rollover distributions from retirement plans (up to $100,000), for NYS/NYC purposes, the distribution would need to be paid back within 60 days to avoid taxation.
- Business interest expense deduction limitation. The aforementioned ATI limitation on the business interest deduction that applies for NYS corporate tax purposes also applies for individual tax purposes.
- The CARES Act allows a deduction for cash contributions to public charities of up to 100% of adjusted gross income (“AGI”). The former rule was 60% of AGI, which still applies for NYS and NYC. In addition, the $300 above-the-line charitable deduction impacting 2020 federal returns would not apply for NYS/NYC purposes.
- A technical correction to the TCJA now allows qualified improvement property (“QIP”) to be depreciated over 15 years, allowing for a 15-year write off and qualifying it for bonus depreciation. This correction can be applied retroactively to 2018. However, it appears that this correction does not apply to NYS/NYC.
- Small business interruption loans. Section 1105 of the CARES Act provides for potential loan forgiveness with respect to SBA 7(a) loans under the Paycheck Protection Program. The loan forgiveness is not taxable for federal purposes. As it stands now, such exemption from taxation would not apply to individual income taxes in NYS/NYC
Any state that is a “rolling conformity” state will need to take action in order to decouple. Other states that have “fixed conformity,” meaning their tax statutes tie to a specific version of the IRC, may not need to take legislative action. The many other states that are neither “rolling” nor “fixed” conformity states may need to take separate legislative action to deal with the CARES Act. Given that not all state legislatures are currently in session, it may be a while before each state’s position is known.
Please contact your Mazars USA LLP professional for additional information.