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New York City Enacts Corporate Income Tax Conformity Package

3 min readBy: Liz Malm

Earlier this month, New York City enacted legislation that conforms many of the state-level corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reforms signed into law by New York Governor Andrew Cuomo last year. While the City’s tax package doesn't adopt all of the state changes, it still makes significant progress in making New York City a better place to do business by reducing compliance costs.

Changes will be retroactive to January 1, 2015. Bill text can be found here. See a summary of tax changes provided by the City here.

According to Tax Analysts [subscription required],

S 4610, like the state's new regime, merges the bank tax with the corporate franchise tax, phases in single-sales- factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. , adopts market-based sourcing, and institutes unitary combined reporting. However, S 4610 doesn't apply to S corporations, which remain taxable under the city's previous corporate tax structure. The legislation also doesn't change the unincorporated business tax for the city, nor does it restore a city tax on the earnings of nonresidents.

Further, the new legislation doesn't conform the city's economic nexus threshold to new standards for the rest of the state. In the state, there is a threshold of $1 million in receipts for economic nexus…

One additional non-conforming provision is worth mentioning. The City tax package reduces the number of corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. bases from four to three (definitely a move in the right direction), while the state is further reduces the number of bases to just two. As I pointed out in January:

Unfortunately, the City will not phase out one of the corporate tax bases that is being phased out by the state—the capital base. Prior the 2013 state reforms, four tax bases existed in New York State, and a business would pay the highest of them. These were (1) 7.1 percent of net income; (2) 0.15 percent on "business and investment capital base" (more info on this here); (3) an alternative minimum tax of 1.5 percent; or (4) a fixed dollar amount tax.

The 2013 state reforms eliminated the capital base (2) and the alternative minimum tax (3). The city will retain the capital base, however.

This capital tax will have a higher maximum payment level of $10 million, increased from its current level of $1 million. The general 0.15 percent rate is reduced to 0.04 percent for cooperative housing corporations.

State legislation from last year created a preferential tax rate for certain manufactures by reducing their net income tax rate to zero. These types of carve-outs aren't good policy because they don’t treat businesses similarly and they shrink the size of the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. (forcing the rate to be higher on other types of firms to bring in the same amount of revenue). The best structured taxes are those that have broad bases and a single rate on all firms, regardless of size or industry.

The City tax package doesn't go so far as to reduce the manufacturer rate to zero, but it does create several special rates for certain types of businesses. These include:

  • Special net income rates for certain small businesses and manufacturers. These include a tax rate reduction from 8.85 percent to 6.5 percent for qualified small non-manufacturers and rate reduction from 8.85 percent to 4.425 percent for qualified small manufacturers. To obtain these preferential rates, businesses must meet certain business income requirements, with smaller income businesses getting a lower rate. Preferential rates are phased out as business income increases.
  • A new income tax rate of 9 percent is created for financial corporations with more than $100 billion in assets.

More on New York here.