NYS Corporate Tax Reform Overview. Stephen J. Sprada, CPA

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1 NYS Corporate Tax Reform Overview Stephen J. Sprada, CPA

2 Reasons for Reform Structure was outdated Structure created disincentives to doing business and expanding in New York Complexity Uncertainty

3 Broad Goals of Reform Equity Efficiency Simplicity Ease of administration and compliance Reliability and stability Economic competitiveness

4 What s in the 2015 CT Reform Merge Article 32 into Article 9-A Apportion income using single receipts factor with customer sourcing (market-based approach) Full unitary water s-edge combination, 50% ownership Eliminate separate treatment of subsidiary capital and income Narrow definition of investment capital and income

5 What s in the 2015 CT Reform (cont.) Eliminate special provisions to the extent possible Couple base broadening with rate reduction Lower the entire net income rate from 7.1% (TY 2015) to 6.5% (TY 2016 and forward) Increase in the MTA Surcharge rate to hold the MTA harmless

6 9-A Forms and Instructions Extensive revisions made to the CT-3, CT-3-A, and CT-3-M forms and instructions CT-3 and CT-3-A remain main forms

7 New Attachments to CT-3 or CT-3-A CT-225 and CT-225-A, New York State Modifications, separate and combined CT-225-A/B, Group Members Detail Spreadsheet: New York State Modifications CT-3.1, Investment and Other Exempt Income and Investment Capital CT-3.2, Subtraction Modifications for Qualified Banks

8 New Attachments to CT-3 or CT-3-A (cont.) CT-3.3, Prior Net Operating Loss Conversion (PNOLC) Subtraction CT-3.4, Net Operating Loss Deduction (NOLD) 3-A-B/C, Member s Detail Report CT-60, Affiliated Entity Information Schedule

9 Overview Part 1: Who is subject to tax? Part 2: What is taxable? Part 3: Sourcing income to New York Part 4: MTA Surcharge

10 Part 1: Who is Subject to Tax? Nexus expansion Combined reporting

11 Nexus Expansion Economic nexus adopted for all taxpayers Deriving receipts from New York activity $1 million de minimis New York receipts threshold: performed annually; presumed met in subsequent tax years For combined groups, members with New York receipts of $10K or more must aggregate receipts and apply test on combined basis; includes receipts from members protected by PL

12 Nexus Expansion (cont.) Economic nexus rules apply to S corporations If partnership is doing business in New York State, then generally all corporate partners are taxable; in applying the $1M receipts test, all of the partnership s receipts are considered (not just the corporate partner s proportionate share.)

13 Combined Reporting Full unitary water s-edge with 50% ownership test Commonly owned 7-year group election Aliens with effectively connected income (ECI) can be included in group Cross-article combination remains prohibited Only taxpayer members of group are subject to separate fixed dollar minimum (FDM) tax

14 Part 2: What is Taxable? Attributes of tax reform Business income base Alternative bases Investment capital and income Other exempt income Interest expense attribution Net operating losses (NOLs)/prior net operating loss conversion (PNOLC) subtraction

15 Business Income Base Primary tax base is business income base Starting point: FTI for U.S. corporations, and effectively connected income (ECI) for alien corporations

16 Business Income Base (cont.) Business income base is a remainder subject to apportionment after: New York modifications: additions and subtractions; subtraction modification for qualified banks; subtraction for investment and other exempt income; attribution of interest expenses; addback of income previously reported as investment income; and NOLs taken against apportioned base

17 Business Income Base Rates General business income base rate = 6.5% (2016+) Manufacturers = 0% combined group as a whole must meet the >50% receipts from manufacturing test QETCs = 5.5% (2017) and 4.875% (2018) each member of the combined group must qualify under Public Authorities Law Section 3102E Small business = 6.5%

18 Investment Capital Investment capital is stock of non-unitary corporations that meet the following five criteria: satisfy capital asset definition under IRC 1221; held for investment for more than one year; holding period measured across tax years generates long-term capital gains/losses under IRC; never been held for sale to customers*; and be identified as held for investment in same manner as required under IRC 1236(a)(1) see TSB-M-15(4)C, (5)I, and TSB-M-15(4.1)C, (5.1)I. * for stocks acquired on/after 1/1/15

19 Investment Capital (cont.) Investment capital also includes assets that generate income that cannot be apportioned under the U.S. Constitution Investment capital is exempt from tax

20 Investment Income Investment income is income and net gains from investment capital, minus interest deductions attributable to such income and capital Investment income is limited to the greater of 8% of ENI, or the amount (prior to attribution) that New York cannot tax under the U.S Constitution Investment income is exempt from tax

21 Other Exempt Income Other exempt income is the sum of exempt-controlled foreign corporation (CFC) income and exempt unitary dividends exempt CFC income is income received from a CFC that is conducting a unitary business with the taxpayer, but is not included in the combined group exempt unitary dividends are dividends from unitary corporations not in the combined group Other exempt income is exempt from tax

22 Interest Expense Attribution Attribution required only for interest expenses related to investment and other exempt income If actual expenses exceed income, the excess must be added back to ENI All amounts related to investment income and capital must be added back, even if investment income is limited to 8% of ENI

23 Interest Expense Attribution (cont.) In lieu of performing actual attribution, taxpayers can elect to reduce tax exempt income by 40% If election is made, it applies to both investment income and other exempt income Election applies to all members of a combined group 40% safe harbor is prohibited for cross-article dividends

24 Prior NOL Conversion Subtraction NOLs incurred before the 2015 tax year are converted into a prior NOL conversion (PNOLC) subtraction to stabilize their value for financial accounting purposes Calculate the PNOLC subtraction pool as follows:

25 Prior NOL Conversion Subtraction Taxpayers can choose to use: 1/10 of pool over next 20 tax years 1/2 of pool over next two tax years Deducted from apportioned business income Required to use only an amount necessary to reduce the tax on business income to the higher of the tax on business capital or the FDM Qualified small businesses not subject to limitations

26 New NOL Rules Three year unlimited carry back, 20 year carry forward; post-reform losses can not be carried back to pre-reform years No longer limited by the federal NOLD source year or amount Calculated on an apportioned basis

27 New NOL Rules (cont.) Deducted from apportioned business income after PNOLC subtraction Required to use only an amount necessary to reduce the tax on business income to the higher of the tax on business capital or the FDM

28 Alternative Tax Bases Business capital Phased out by 2021 Capped at $350,000 for manufacturers and QETCs; $5 million for all others NYC retains capital base with higher cap of $10M Fixed dollar minimum (FDM) tax Sliding scale based on New York State receipts Ranges from $25 to $200,000

29 Part 3: Sourcing Income to New York Apportionment of business income and capital Qualified financial instruments (QFIs) Digital products Other services and other business receipts

30 Apportionment of Business Income and Capital Adopts single receipts factor apportionment with full customer sourcing rules for all taxpayers Statute expands the type of receipts for which sourcing rules are specifically enumerated Creates hierarchies and safe harbors to assist with difficult-to-source receipts Current apportionment rules for trucking, railroads, transportation of gas, and aviation are used as the basis for the new receipts rules for these industries

31 Qualified Financial Instruments (QFIs) New sourcing rules created for apportioning income from financial instruments; qualified financial instruments (QFIs) are generally financial instruments marked to market under I.R.C. section 475 or section 1256 Taxpayers can elect to apportion to New York at 8%

32 Digital Products Taxpayers must source receipts from digital products based on the following hierarchy: 1. customer s primary use location of the product; 2. location where the digital product is received by the customer; 3. apportionment fraction for the preceding year for such digital product receipt; and 4. the apportionment fraction for the current year for receipts from all digital products. Taxpayers must exercise due diligence before rejecting a method and moving to the next method in the hierarchy.

33 Other Services and Other Business Receipts Services are now sourced to where the benefit is received by the customer, instead of where the service is performed Taxpayers must source unenumerated receipts using the following hierarchy: 1. where the benefit is received; 2. delivery destination; 3. apportionment fraction for the preceding year for such receipt; and 4. the apportionment fraction for the current year for receipts from all other services and other business receipts. Taxpayers must exercise due diligence before rejecting a method and moving to the next method in the hierarchy

34 Part 4: MTA Surcharge Surcharge made permanent in all articles; the rates and calculations under Article 9 and Article 33 remain unchanged Economic nexus standard also applies to the MTA surcharge; apportionment remains 3 factor, however

35 Part 4: MTA Surcharge (cont.) Base is changed to New York State tax before credits for current year Surcharge rate: set in statute for 2015 at 25.6% tax Commissioner to set annually thereafter 2016: 28% 2017: 28.3% 2018: TBD

37 Efficiency Integrity Fairness

38 Corporate Tax Reform Update Mark Stein, CPA Corporation Tax Auditor III

39 Update Topics Recap of corporate tax reform Where to obtain guidance Common errors on 2015 returns Recent changes

40 Recap of Corporate Tax Reform Enacted in 2014, generally applicable for periods beginning on or after January 1, 2015 Modernized and streamlined the tax code, and provided clarity and certainty Addressed the most common areas of dispute between taxpayers and the Tax Department Included tax cuts that bring the corporate tax rate to the lowest level since the late 1960s

41 Recap of Corporate Tax Reform Repealed Article 32 and merged the taxation of banks and general corporations into Article 9A Simplified combined reporting, attribution of expenses, and allocation of investment income Modernized the receipts sourcing rules, and moved to market based sourcing for all types of receipts

42 Where to Obtain Guidance Visit the Tax Department website at Click on Businesses at the top of the screen Look for the link to Corporate Tax Reform 2015

43 Where to Obtain Guidance Draft regulations page includes the following drafts: Nexus Receipts from digital products Services and other business receipts Discretionary adjustments General apportionment Combined reports MTA surcharge PNOLC subtraction

44 Where to Obtain Guidance Additional information on website Link to all New York State laws FAQ page Technical memos Guide to completing Form CT-3 Subscription service link

45 Where to Obtain Guidance Frequently asked questions (FAQs) Taxpayers and practitioners can send specific questions to the Tax Department Questions that are commonly asked or have broad applicability are posted to site FAQ site sorted by topic

46 Where to Obtain Guidance Technical memos: six currently posted Transitional filing provisions Investment capital (two memos) Impact on S corporations and shareholders Attribution of interest deductions Summary of 2016 changes

47 Where to Obtain Guidance Forms and instructions Represent the latest guidance on how the reform law works Information may be added to forms and instructions while the regulations are still being drafted

48 Common Errors Three new webpages created to address common errors avoid common Article 9-A corporation tax filing errors change in treatment of net operating losses (NOLs) foreign corporate limited partners: separate accounting election All located on the Corporation Tax landing page

49 Common Errors on 2015 Returns PNOLC v NOL pre-2015 losses generate a PNOLC subtraction, while 2015 and later losses generate NOLs PNOLC based on BAP from last pre-reform return amounts should be reported as a positive value Checkboxes make sure these are checked appropriately incorrect or blank checkboxes can result in tax being re-calculated

50 Common Errors on 2015 Returns New York State Modifications (CT-225) use positive value for modifications use valid code for form type to identify additions and subtractions to business income Overpayments and credits overpayments and tax credits must be tracked separately

51 Common Errors on 2015 Returns Combined reports Counts of entities in combined return front page of return, box C, must include the designated agent and all members including nontaxpayers page 2, section C must include all combined members but exclude the designated agent CT-3-A/BC each member, including nontaxpayers, must file must include designated agent s EIN

52 Common Errors on 2015 Returns Incomplete apportionment information may be recalculated at 100% if not filled in Do not report $300 fixed dollar minimum maintenance fee was repealed; FDM based on New York receipts

53 Filing Extensions An extension must be filed on or before the original due date for it to be valid The amount paid must be at least 90% of the current year s tax, or at least 100% of the previous year s tax, for it to be valid For short-period filers, or first-year filers, only the 90% rule determines validity

54 Combined Filer Extension Tips CT-5.3 filed by designated agent include all corporations included in the combined group for period being extended CT-5 filed by individual members that are: included in a new combined group for period being extended new to the combined group for period being extended Nontaxpayer members are not required to file Form CT-5

55 Recent Changes: Tax Rates General business income base rate decreased to 6.5% in 2016 QETC rate lowered to 5.5% in 2016 & 2017; 4.875% in 2018 General rate on capital base decreased to 0.125% in 2016, 0.1% in 2017, 0.075% in 2018 manufacturers, QETCs, and housing co-ops have similar reductions rates continue to phase down until 2021 when base is eliminated

56 Recent Changes: Tax Rates Fixed dollar minimum tax amounts for manufacturers and QETCs lowered for 2016 and 2017; phased down once more in 2018 REITs/RICs have new FDM schedule topping out at $500 in 2016 MTA surcharge increased to 28% in 2016 and 28.3% in 2017 increase anticipated for 2018

57 Recent Changes: Return Due Date To mirror federal changes, the due date for 2016 and later corporate returns is now April 15 (or the 15th day of the 4th month after year end) First installment still due March 15 Due date for S corp returns is still March 15

New Form CT-300: Mandatory First Installment (MFI) of estimated tax for corporations Form CT-300 was created since the first installment is now due before the

58 New Form CT-300: Mandatory First Installment (MFI) of estimated tax for corporations Form CT-300 was created since the first installment is now due before the extension The MFI is now based on the tax for the second preceding tax year Form must be filed even if you have adequate payments to ensure proper classification

60 Connect With Us Visit our website for the most up to date info on CT Reform NYSTaxDepartment NYSTaxNews NYSTax Online Demos Subscription Service

61 Efficiency Integrity Fairness

NEW YORK CORPORATE TAX REFORM

I. Overview A. Goals NEW YORK CORPORATE TAX REFORM Jeffrey S. Reed Chair, State and Local Tax Department Kilpatrick Townsend LLP (212) 775-8792 jsreed@kilpatricktownsend.com 1. Modernization. In the words