The New York State Legislature passed a bill (Bill No. A10519 / S08411) that would amend the administrative code of the city of New York and decouple from certain amendments made by the CARES Act (Pub. L. 116-136) to the Internal Revenue Code (“IRC”) for the New York City (“NYC”) unincorporated business corporation tax (“UBT”), general corporation tax (“GCT”), banking tax (“Bank Tax”) and business corporation tax (“BCT”). The bill needs to be approved by Governor Andrew M. Cuomo to become law.

Per a New York State issued Memorandum in Support of the Legislation (“Memorandum”), if the decoupling provisions in the bill are not enacted, NYC stands to lose at least $50 million in fiscal year 2020/21 and $25 million in fiscal year 2021/22. The Memorandum further states that because NYC is facing a potential revenue gap of $5.4 billion in fiscal year 2020/21, NYC cannot afford to lose these millions of dollars in revenue at this time. 

As discussed in greater detail here, the CARES Act modified the interest deduction limitations by:

• Allowing non-partnerships to modify the calculation of their interest deduction limitation for taxable years beginning in 2019 and 2020 by including 50% of its adjusted taxable income (instead of just 30%).
• Allowing partnerships to modify the calculation of their interest deduction limitation for taxable years beginning in 2020 by including 50% of its adjusted taxable income (instead of just 30%).
• Allowing partners in a partnership are able to deduct 50% of the allocated excess business interest expense (i.e., business interest expense that is paid or accrued at the partnership in excess of the partnership’s interest deduction limitation) for 2019 to deduct 50% of such amount in 2020 without regard to the interest deduction.
• Allowing taxpayers to use its 2019 adjusted taxable income (as opposed to its actual adjusted taxable income) to calculate its 2020 interest deduction limitation.

As we previously highlighted in our April tax alert, New York was the first state to decouple from certain amendments made by the CARES Act. In particular, for purposes of the New York State franchise tax and the NYC’s BCT, GCT, and UBT, the State and City decoupled from and disallowed deductions for interest payments permitted by IRC section 163(j)(10)(A)(i), which allows taxpayers to modify the calculation of their interest deduction limitation for taxable years beginning in 2019 and 2020 by including 50% of its adjusted taxable income (instead of just 30%). The State Legislature has now advanced a bill for Governor Cuomo’s approval to decouple from certain amendments made by the CARES Act to the IRC for the NYC taxes discussed below.

Further Changes to Interest Deduction

With respect to NYC’s UBT, GCT, Bank Tax, and BCT, the current bill further decouples from amendments made to the IRC by the CARES Acts by more broadly decoupling from IRC Section 163(j)(10).  Thus, in addition to the legislation that was passed in April, the current bill would disallow NYC taxpayers from deducting interest expense from the following CARES Act changes made with respect to the deductibility of interest:

• The ability of a partnership to increase its interest deduction limitation for taxable years beginning in 2020.
• The ability of a partner who was allocated excess business interest expense for 2019 to deduct 50% of such amount in 2020 without regard to the interest deduction.
• The ability to use its 2019 adjusted taxable income (as opposed to its actual adjusted taxable income) to calculate its 2020 interest deduction limitation. As a result, taxpayers will need to use their actual 2020 adjusted taxable income to calculate their 2020 interest deduction limitation.

Net Operating Losses

As discussed in greater detail here, the CARES Act modified the net operating loss (“NOL”) deduction for taxable years beginning after December 31, 2017, and before January 1, 2021, by not subjecting the deduction to the 80% taxable income limitation added as part of the TCJA, and allowing for the carry back of any NOLs arising in those taxable years for five taxable years.

Unlike for the New York State franchise tax and NYC BCT, for purposes of the NYC UBT, GCT, and Bank Tax, taxpayers may generally deduct NOLs, subject to certain exception, in an amount computed in the same manner as the NOL deduction that is allowed for the taxable year for federal income tax purposes. To address the anticipated decline in NYC tax revenue, the bill decouples from the CARES Act’s amendments to the net operating loss deduction, and the ability to carry back a net operating loss for purposes of NYC’s UBT, GCT, and Bank Tax. As a result, the net operating loss deduction would still be subject to the income limitation and taxpayers would be able to carry over, as opposed to carrying back, any net operating losses it incurs.

Loss Limitations for Pass-through Businesses and Sole Proprietors

Similar to the changes to the net operating loss rules, the CARES Act also modified the rules regarding the ability of owners of pass-through businesses and sole proprietorships to use trade or business losses to offset nonbusiness income for taxable years beginning after December 31, 2017 and before January 1, 2021. The bill provides that this change does not apply for the purposes of the NYC UBT.

A&M Taxand Says

The aforementioned legislation demonstrates how New York continues to manage its budget constraints due to the COVID-19 pandemic, however, this bill still requires Governor Cuomo’s approval.

Needless to say, each state and/or local jurisdiction has the discretion to address the economic impact of COVID-19 and adopt or decouple from the CARES Act provisions. We recommend that taxpayers monitor 2020 legislation for each state or local jurisdiction in which they have a filing obligation to optimize their tax positions and ensure prospective compliance. Please feel free to contact us to discuss your personal situation.