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New York Reduces the Franchise Tax for Small Businesses

By Mark H. Levin

NOVEMBER 2006 - The 2005/2006 New York State Budget Act reduced the entire net income (ENI)–based general corporation franchise tax (Article 9-A) for small business taxpayers from 6.85% to 6.5%. This reduction of the small business tax rate is the latest in a series of reductions that have lowered the tax rate from 9%, the rate for years beginning before July 1, 1999.

In addition to the reduction in the small business tax rate, the Act also widened the definition of a small business taxpayer. Effective for tax years beginning on or after January 1, 2006, a small business taxpayer is defined as one whose ENI does not exceed $390,000.

The new 6.5% rate applies to all taxpayers whose ENI does not exceed $290,000. For taxpayers whose ENI is between $290,000 and $390,000, the 6.5% small business rate phases out until it reaches the regular franchise tax rate of 7.5%.

The ENI-based franchise tax should be computed as follows:

  • If the ENI does not exceed $290,000, the tax rate is 6.5% of the ENI base.
  • If the ENI exceeds $390,000, the tax rate is 7.5% of the ENI base.
  • If the ENI exceeds $290,000 but does not exceed $390,000, the tax is computed by adding the following amounts—
  • $18,850 (6.5% of the first $290,000 of the ENI base), plus
  • 7.5% of any ENI base over $290,000, plus
  • 7.25% of any ENI base over $350,000.

When computing the Metropolitan Commuter Transportation District Surcharge, however, a taxpayer must recompute its tax using the rates that were in effect for the period from July 1, 1997, through June 30, 1998.

While the above changes made by the Act reinstate a somewhat complex tax calculation, they do reduce the tax burden on small businesses.

Mark H. Levin, CPA, is manager, state and local taxes, at H.J. Behrman & Company, LLP, New York, N.Y.