New York Legislation Seeks to Further Decouple from the Federal CARES Act for New York City Taxes

The New York State Legislature passed a bill that would amend the administrative code of the city of New York and decouple from certain amendments made by the CARES Act (Pub. L. 116-136) to the Internal Revenue Code (“IRC”) for the New York City (“NYC”) unincorporated business corporation tax (“UBT”), general corporation tax (“GCT”), banking tax (“Bank Tax”) and business corporation tax (“BCT”). The bill needs to be approved by Governor Andrew M. Cuomo to become law.

Per a New York State issued Memorandum in Support of the Legislation (“Memorandum”), if the decoupling provisions in the bill are not enacted, NYC stands to lose at least $50 million in fiscal year 2020/21 and $25 million in fiscal year 2021/22. The Memorandum further states that because NYC is facing a potential revenue gap of $5.4 billion in fiscal year 2020/21, NYC cannot afford to lose these millions of dollars in revenue at this time.

As discussed in greater detail here, the CARES Act modified the interest deduction limitations by:

• Allowing non-partnerships to modify the calculation of their interest deduction limitation for taxable years beginning in 2019 and 2020 by including 50% of its adjusted taxable income (instead of just 30%).
• Allowing partnerships to modify the calculation of their interest deduction limitation for taxable years beginning in 2020 by including 50% of its adjusted taxable income (instead of just 30%).
• Allowing partners in a partnership are able to deduct 50% of the allocated excess business interest expense (i.e., business interest expense that is paid or accrued at the partnership in excess of the partnership’s interest deduction limitation) for 2019 to deduct 50% of such amount in 2020 without regard to the interest deduction.
• Allowing taxpayers to use its 2019 adjusted taxable income (as opposed to its actual adjusted taxable income) to calculate its 2020 interest deduction limitation.

As we previously highlighted in our April tax alert, New York was the first state to decouple from certain amendments made by the CARES Act. In particular, for purposes of the New York State franchise tax and the NYC’s BCT, GCT, and UBT, the State and City decoupled from and disallowed deductions for interest payments permitted by IRC section 163(j)(10)(A)(i), which allows taxpayers to modify the calculation of their interest deduction limitation for taxable years beginning in 2019 and 2020 by including 50% of its adjusted taxable income (instead of just 30%). The State Legislature has now advanced a bill for Governor Cuomo’s approval to decouple from certain amendments made by the CARES Act to the IRC for the NYC taxes discussed below.

Further Changes to Interest Deduction

With respect to NYC’s UBT, GCT, Bank Tax, and BCT, the current bill further decouples from amendments made to the IRC by the CARES Acts by more broadly decoupling from IRC Section 163(j)(10). Thus, in addition to the legislation that was passed in April, NYC taxpayers would not be permitted to deduct interest expense from the following CARES Act changes made with respect to the deductibility of interest in the current bill…

https://www.alvarezandmarsal.com/insights/new-york-legislation-seeks-further-decouple-federal-cares-act-new-york-city-taxes