New York’s 2021-2022 Budget Bill includes a five-year, $306 billion infrastructure plan, tax increases for individuals and businesses, and an elective pass-through entity tax
CohnReznick’s Construction Practice
On April 19, 2021, New York State Gov. Andrew Cuomo signed the state’s 2021-2022 Budget Bill. The most notable items for contractors operating in New York to consider are as follows:
- A five-year, $306 billion infrastructure plan
- Increases to the New York State corporate and personal income tax rates on income that exceeds certain income thresholds
- A work-around to help address the impact of the federal cap on state and local tax deductions (the $10,000 SALT cap that was enacted as part of federal Tax Cuts and Jobs Act of 2017), by allowing partnerships and S corporations to pay an optional pass-through entity (PTE) income tax that would be allowed to be taken as an offsetting personal income tax credit for the portions of the PTE tax paid by the entity that are attributable to such partners/shareholders.
Summarized below are some of the key tax and infrastructure provisions in the Budget Bill.
The five-year, $306 billion infrastructure plan aims to rebuild roads, bridges, airports, and mass transit systems, build affordable housing and new schools, and build and improve park facilities, as well as invest in energy efficiency upgrades. This budget also supports the MTA’s five-year $51.5 billion Capital Plan, as well as the DOT’s two-year $11.9 billion Capital Plan.
According to a state summary, the infrastructure plan will be allocated as follows:
- $190 billion for transportation, including mass transit, railroads, airports, highways, bridges, and tunnels across the state
- $33 billion for improvements to environmental facilities and parks, and the development of green energy
- $33 billion for economic and community development
- $14 billion for the construction of affordable housing
- $19 billion to help school districts build “new and better” school buildings
- $17 billion to improve and maintain SUNY and CUNY buildings, state health care facilities, and other capital assets.
The Budget Bill sets the tax rate for corporations with business income that exceeds $5 million at 7.25%, up from 6.5%. It also delays the scheduled phase-out of the capital base tax to Jan. 1, 2024, and establishes a tax rate of 0.1875% for tax years beginning on or after Jan. 1, 2021. Note that the phase-out delay does not apply to manufacturers and small businesses.
Personal income tax
The Budget Bill increases the personal income tax rates on high-income earners for the 2021 through 2027 tax years. The new rates are as follows:
- 65% for individuals with income over $1,077,550 but not over $5 million; joint filers with income over $2,155,350 but not over $5 million; and heads of household with income over $1,646,450 but not over $5 million
- 30% for all classes of taxpayers with income over $5 million but not over $25 million
- 90% for all classes of taxpayers with income over $25 million
Factoring in the current New York City personal income tax rate (3.876%), these new rates will result in a combined state and local personal income tax rate of 14.776% for affected high-income taxpayers with taxable income exceeding $25 million. Clearly, high-net-worth individuals will be significantly impacted by this increase in personal income tax rates.
Pass-through Entity Tax
Effective for 2021, partnerships and S corporations can elect to pay an optional pass-through entity income tax on the entity’s taxable income at rates ranging from 6.85% to 10.9%. Partners/shareholders of electing partnerships and S corporations will be allowed to take an offsetting personal income tax credit for the portions of the PTE tax paid by the entity that are attributable to such partners/shareholders.
An irrevocable, annual election must be made by the due date of the first estimated tax payment. For the 2021 tax year, the election must be made on or before Oct. 15, 2021, and there are no estimated taxes required to be remitted.
Resident Tax Credit
The Budget Bill also amends the resident tax credit provisions, and, effective for the 2021 tax year, New York residents who are partners or shareholders in entities that pay “substantially similar” PTE in other jurisdictions will be allowed a credit for their respective share of PTE taxes paid to other states. Prior to this amendment, it was the Department’s position that residents were not eligible for such a resident tax credit for entity-level taxes paid.
Sales and Use Tax
The Budget Bill increases the threshold from $300,000 to $500,000 for gross receipts from property delivered into New York State and maintains the threshold of 100 sales transactions in the state to require vendors to register in response to the Wayfair decision.
Real Estate Transfer Tax
The Budget Bill clarifies that the Real Estate Transfer Tax is the responsibility of the grantor. The grantor cannot pass the liability to the grantee unless there is a contract or a written agreement between both parties.
Real Property Tax Relief Credit
Individuals with qualified adjusted gross income of less than $250,000 will be eligible for a new credit if New York real property taxes on their New York State principal residence exceed 6% of qualified adjusted gross income. The credit is based on the real property tax paid in excess of that 6% amount, and the rate is determined on a gradual sliding scale from 14% to 0%.
Qualified Opportunity Funds
Effective Jan. 1, 2021, taxpayers will no longer be able to defer current capital gains by reinvesting them into Qualified Opportunity Funds. The Budget Bill no longer allows a federal exclusion of the reinvested capital gain amount, and now requires an add-back modification for the gains deferred in the year of such deferral.
Employees working outside N.Y. due to COVID-19
Due to COVID-19, many businesses have New York-based employees working remotely. The Budget Bill allows these businesses to treat “such remote work as having been performed at the location such work was performed prior to the declaration of such state disaster emergency,” in order to claim tax credits and incentives requiring a minimum number of employees.
It is critical to note that the Budget Act does not address the personal income tax implications of remote workers. That is, the Department has already made its position clear on remote workers and its interpretation of its “convenience of the employee” rule. In this regard, “if you are a nonresident [of New York] whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location.”
What does CohnReznick think?
Based on the size and scale of the infrastructure plan, which includes funds for the multibillion-dollar “Midtown West” redevelopment project, New York City-area contractors should remain vigilant to continue to play to their strengths and avoid the temptation of taking on work just to fill their backlogs.
Given the magnitude and complexity of the tax changes in the Budget Bill, all taxpayers (New York and non-New Yorkers) should review the new provisions to see how these changes impact their specific tax positions. In addition, given New York State’s tax rate increases on high-net-worth individuals and businesses, coupled with the pandemic’s current remote workforce climate, we would anticipate more individuals contemplating a change in domicile/residency outside of New York State and businesses exploring whether they need to have a physical location within the State of New York.
Moreover, partnerships and S corporations also need to evaluate whether the newly enacted PTE tax should be timely elected and whether this would be beneficial to their respective entities and partners/shareholders. We expect that the Department will need to issue clarifying guidance on the PTE, as we anticipate there will be many open questions that will have to be addressed based on what we have seen in other states that are administering a PTE.
DISCLAIMER: Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Anthony J. Campolo, CPA
Arvinder Kaur, CPA
Corey L. Rosenthal, JD