The New York Legislature and Governor Andrew Cuomo announced an agreed upon state budget package on April 7, 2021 which was subsequently signed into law by the Governor on April 19, 2021. 

There are three significant changes included in the 2021-2022 New York state budget that should be brought to everyone’s attention. These represent the Good, the Bad, and the Ugly!

  1. Here’s the Good News: The inclusion of a Pass-Through Entity tax.
  2. Here’s the Bad News: An increase in the corporate franchise tax rate.
  3. Here’s the Ugly News: Higher personal income tax rates for individuals who earn more than $1 million annually.

While we are focusing this article on these top three issues, other provisions included in the budget address less high-profile amendments to the real estate transfer tax, qualified opportunity funds, and the impact of a remote workforce on state tax benefits. We will be happy to discuss these with you according to your own situation. 

Here is a brief description of each of the Good, Bad and Ugly key components and the impact on New York taxpayers.

The Good: The Pass-Through Entity Tax 

In passing this budget, New York became one of several states that has adopted a Pass-Through Entity (PTE) tax as an effective means of going around the challenges that limited the deductibility of state and local taxes as presented in the Tax Cuts and Jobs Act of 2017. For those states that embrace the new PTE tax, eligible entities that elect to be taxed at the entity level will be able to provide their owners (partners/members) with an offsetting credit equal to their appropriate share of the tax paid by the PTE. By doing so they will circumvent the $10,000 limit on state and local tax (SALT) deductions.     

In New York, the newly adopted Pass-Through Entity (PTE) tax is effective for S Corporations and partnerships, which are defined under IRC Section 7701(a) and (2), enabling them to elect to pay a pass-through entity income tax rate from 6.85% to 10.9% on that entity’s taxable income. The direct shareholders of the S Corp or the direct partners (or members) of the partnership will be allowed to take advantage of the offsetting personal income tax credit.

The New York legislation offers further guidance on protocol regarding when to make the election, who is authorized to do so, how to claim the credit, how to calculate the estimated tax payments and adhering to the filing deadlines, as well as what additional information must be included in the annual tax return.

Top 10 Quick Tips-at-a-Glance:

  1. For S Corporations the election must be made by an authorized officer, manager or shareholder; for partnerships, the election must be made by any manager, partner, owner or other individual with authority to bind the entity or sign returns.
  2. For the 2021 tax year, the election must be made no later than October 15, 2021.
  3. For calendar year taxpayers, PTE tax returns are generally due by March 15 of the following year – for both S Corps and partnerships.
  4. For fiscal year entities, the return will be due on March 15 following the close of the calendar year that contains the final day of the entity’s tax return.
  5. One a PTE tax return has been filed it cannot be amended without the State Tax Commissioner’s authorization.
  6. After the annual election has been made, it is irrevocable for the given tax year.
  7. Owners of the electing PTEs will generally be entitled to a credit based on their distributive share of the PTE taxes paid by the entity on their personal tax return.
  8. The New York PTE tax is an elective tax that allows eligible partnerships and corporations in the state to pay an entity-level beginning rate of 6.85% of its NY taxable income – up to $2 million. The PTE tax rate would be applied based on the pass-through entity’s taxable income.
  9. No estimated taxes will be required to be made for the 2021 tax year ONLY.
  10. Estimated tax payments are to be made by March 15, June 15, September 15 and December 15 regardless of calendar or fiscal year end – beginning with March 15, 2022.

The Bad: An increase in the corporate franchise tax rate

For taxpayers with a business income base in excess of $5 million, the new budget increases the corporate franchise tax rate from 6.5% to 7.25% beginning on or after January 1, 2021 and before January 1, 2024. 

Along with this franchise tax rate increase, the rate of the capital base, which was to be at 0% starting in 2021, has now been delayed. The 0% rate will not go into effect until 2024.

The Ugly: Higher personal income tax rates for individuals who earn more than $1 million annually

When combined with the current New York City personal income tax, the new tax increases in the recently passed budget means that New York taxpayers who fall into this category will face the highest state and local personal income tax rates in the country!

This ugly news is the direct result of budget increases to the personal income tax rates on higher incomes for six years, commencing 2021 through 2027. Prior to the signing of the new budget into law, 8.2% was the highest state income tax rate, but going forward that rate will be increased to 9.65%.  This rate increase will be applied based on filing status (married filing jointly; resident heads of household; or single or married individuals filing separately).

The new, higher rate will be applied to income over $2,155.350 – but not exceeding $5 million for married individuals filing jointly or on income over $1,646,450 -but not over $5 million for resident heads of household or, lastly, on income over $1,077,050 – but not over $5 million for unmarried individuals, married individuals filing separately as well as for estates and trusts.

One other addition to the 2021-2022 budget is the creation of two new tax brackets. One bracket will tax income over $5 million but not over $25million at a rate of 10.3%, and the second will tax income over $25 million at a rate of 10.9%.

We hope this overview has provided you with some ideas of the impact of the New York State budget and the potential impact of the core issues on you. Please feel free to contact us.

Michael LaForge is a Member of the Firm at SobelCo.  Mike applies his years of professional experience across a wide range of industries including nonprofit, school districts, construction, real estate and professional organizations.  Currently Mike continues to provide strategic business and tax planning focusing primarily on manufacturing and distribution clients operating both domestically and internationally.  He has served closely held businesses' his entire career and uses his experience to assist families with business planning, transition and estate issues.