New York City’s 2007 Business Tax Package

By Mark H. Levin

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OCTOBER 2007 - In the waning days of the 2007 legislative session, the New York State Legislature passed New York City’s business tax package (A8275B/S6009B), and it was signed into law by Governor Spitzer on August 1, 2007. This legislation makes some long-awaited changes to the New York City unincorporated business tax (UBT) and the general corporation tax (GCT).

In a separate action, the New York City Council unanimously passed legislation increasing the UBT credit available to New York City resident taxpayers. Mayor Bloomberg signed it into law on July 3, 2007.

Unincorporated Business Tax

Ever since the UBT was first imposed in 1966, the New York City Administrative Code allowed a deduction for only the proprietor’s or each active partner’s services of $5,000 [section 11-509(a)]. Even in 1966, some considered the amount insufficient.

Effective retroactively for tax years beginning on or after January 1, 2007, the legislation amends New York City Administrative Code section 11-509 to increase the deduction for the proprietor’s or each partner’s services to $10,000. While this increase may appear to be insufficient in bringing the value of the original deduction in line with inflation, it is a step in the right direction. This increase in the deduction for the proprietor’s or each partner’s services is somewhat mitigated since the 20% limitation on this deduction remains unchanged. For example, consider the case below:

 
Old Law
New Law
Starting UBT income $200,000 $200,000
Deduction for eight partners $ 40,000 $ 80,000
Limitation ($200,000 x 20%) $ 40,000 $ 40,000
Allowable deduction $ 40,000 $ 40,000
UBT taxable income $160,000 $160,000

In a case like the one above, because the 20% limitation has not increased, the increased deduction for the proprietor/partner’s services may have no effect.

Income-Plus-Compensation Alternative Tax Base

To prevent corporations from lowering their taxable income by disguising dividends as salaries, New York City’s GCT uses an entire net income (ENI)-plus-compensation alternative tax base. The alternative tax calculation takes allocated net income and adds back compensation paid to any shareholders who own more than 5% of the corporation’s outstanding stock. The resulting adjusted net income is reduced by $40,000 and the balance is taxed at 2.655% (30% of the 8.85% corporate income tax rate).

Effective for tax years beginning on or after January 1, 2007, this legislation amends the New York City Administrative Code by adding a new section, 11-604(1)(H)(c), which provides for a 50% phase-out of this tax rate over the next four years as follows:

Taxable Year Beginning
Taxable Portion of Adjusted ENI
Effective Tax Rate
Before 1/1/2007 30.00% 2.655000%
1/1–12/31/2007 26.25% 2.323125%
1/1–12/31/2008 22.50% 1.991250%
1/1–12/31/2009 18.75% 1.659375%
After 1/1/2010 15.00% 1.327500%

This reduction in the income-plus-compensation alternative tax represents real tax savings for corporations that have been paying their GCT computed on this tax base.

Small Business Tax Simplification

When the GCT was first imposed in 1966, all corporations had to compute it under rules that were similar to, but differed in detail to, those used in computing the New York State Article 9-A Franchise Tax. This new legislation adds a new section 11-604(1)(I) that simplifies the filing requirements for certain small businesses.

For the purposes of this legislation, a small business is defined as a corporation that—

  • has less than $250,000 in gross income;
  • allocates 100% of its income to New York City;
  • has no investment capital or income; and
  • has no subsidiary capital or income.

Effective for tax years beginning on or after January 1, 2007, corporations that meet the above criteria may elect to compute their GCT based on their New York State ENI plus any New York City GCT deducted when computing the New York State ENI. It should be noted that the amended code does not provide for a modification for any GCT refund or overpayment included in gross income.

UBT Paid Credit for GCT Taxpayers

Effective for tax years beginning on or after January 1, 2007, section 11-604(18)(b)(2) of the New York City Administrative Code is amended to revise the UBT paid credit available to GCT taxpayers subject to the tax on the ENI-plus-compensation base to reflect the decrease in the effective rate of the ENI-plus-compensation base tax.

In addition, effective for tax years beginning on or after January 1, 2007, a corporation that is not a New York State S corporation and meets the above criteria may elect to pay its tax based on New York State’s ENI rather than separately calculating the tax on New York City’s ENI-plus compensation.

Personal Income Tax

For 2006 and prior years, New York City allowed the owners of unincorporated businesses (proprietors, partnerships, and limited liability companies) to take a partial credit against their resident personal income tax for their share of UBT payments. The current credit is 65% of the taxpayer’s share of UBT paid for taxpayers whose New York taxable income is $42,000 or less; the credit phases out until the UBT credit reaches 15% for taxpayers whose New York taxable income is $142,000 or more.

Effective for taxable years beginning on or after January 1, 2007, section 11-1706(c) of the New York City Administrative Code is amended to increase the credit available to New York City residents for their share of UBT paid, and is increased from the current percentages to 100% of UBT paid for taxpayers whose New York taxable income is $42,000 or less; this phases out until the UBT credit reaches 23% for taxpayers whose New York taxable income is $142,000 or more.


Mark H. Levin, CPA, is manager, state and local taxes, at H.J. Behrman & Company, LLP, New York, N.Y. He is a member and past chair of the NYSSCPA’s New York, Multistate and Local Taxation Committee, and a member of The CPA Journal Editorial Board.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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