Posted by Christian J. Burgos, Managing Director and Co-Head of State and Local Tax Services at Friedman LLP
New York’s recent budget legislation for 2021-2022 introduced many significant state income tax changes that will affect many people and businesses in New York City. The law aims to kickstart the state’s economy by providing a range of tax breaks and incentives to middle-class families, as well as some food and hospitality businesses.
But not all are winners. High-income individuals and the real estate sector in particular are likely to bear the brunt of the costs of Governor Andrew Cuomo’s tax plan.
The comprehensive fiscal legislation that came into effect in April 2021 and usually enters into force in tax year 2021 includes several changes to the personal income tax and corporate franchise tax laws. Combined with NYC tax rates, you get some of the highest tax rates in the country.
The real estate industry, second only to financial services, is one of the largest business segments contributing to New York State’s gross domestic product (GDP). Most real estate businesses are usually organized as partnerships that include individuals, businesses, and institutional investors. may be affected by changes in state tax laws.
From tax year 2021 until the end of 2027, personal income tax rates will be increased for high-income earners. Prior to the amendments to state tax laws, the maximum marginal tax rate was capped at 8.82%.
However, depending on their filing status (e.g. single, married, jointly, etc.), Individuals with income over $ 1 million will now be subject to personal income tax at a rate of at least 9.65 percent. This rises to 10.30 percent for those with income in excess of $ 5 million, and is capped at a maximum marginal tax rate of 10.90 percent for income in excess of $ 25 million.
Likewise, the New York City corporate franchise tax rate was increased from 6.5 percent to 7.25 percent for companies with a tax base of more than $ 5 million. The corporate tax rate remains at 6.5 percent for companies with a tax base of $ 5 million or less.
The increase in personal and corporate tax rates, at least for the time being, should be temporary, as personal income tax rates expire after 2027 and corporate tax rates end after 2023. Individuals and businesses in New York City that generate significant amounts of their income from real estate projects – be it rental income, promotion or promotion of interests, or capital gains – are likely to be among the hardest hit.
Complicating matters further, the separation of the state from the federal Zones of Opportunity program, which defers capital gains recognition for eligible taxpayers who invest in a qualified opportunity fund. Such funds are usually an investment vehicle organized as a partnership or, in some cases, a corporation.
Taxpayers are now typically required to include any capital gains that were otherwise excluded from federal gross income in the state income tax base. Therefore, the income reported on your New York State income tax returns may be significantly higher than the income reported to the IRS.
While tax hikes and separation from the federal Opportunity Zones program seem like a direct hit to high-income people and those working in the real estate industry in general, all is not lost.
Following the recently issued Treasury guidance, the budget legislation created a new tax regime for the electoral through organization (“PTE”). This effectively circumvents the $ 10,000 federal deduction for state and local taxes (“SALT”) cap that was put in place under the 2017 Tax Cuts and Employment Act.
Starting in the current tax year, owners of transit legal entities such as partnerships, limited liability companies (LLCs) and S corporations may elect to be taxed at a business level that is not subject to the SALT restriction for federal income tax purposes. The selectable pass-through entity typically calculates its business income and pays government income tax while retaining certain pass-through functions, including a state tax credit for use by the owners of the select PTE in filing and paying their government income tax returns. …
Tax rates on taxable income for select PTEs range from 6.85% to 10.90%, which generally reflects new levels of personal income tax in the state. In the election of through corporate owners, a refundable credit from their personal income tax is permitted, based on each owner’s distribution share of PTE tax paid. In addition, PTE holders can qualify for credits for multiple PTEs.
So while New York City taxpayers tend to see their government tax spending increase, there is likely to be some relief in terms of federal income tax under the new PTE tax regime.
Overall, the new legislation creates some new challenges for those working in the real estate business, and taxpayers are encouraged to consult with their tax advisors about the impact the recent changes might have on them.
If you have any questions about your obligations under the new New York tax laws, please contact Christian Burgos at: CBurgos@friedmanllp.com or (332) 216-0760.
This content was originally posted on friedmanllp.com…