New York State and City Tax Law Changes: 2010-2011 New York State Budget Is Enacted Four Months Late – Imposes Tax Increases on Individuals and Corporations

Sullivan & Cromwell LLP - August 11,2010

The 2010-2011 New York State Budget (the “Budget”) was enacted on August 4, 2010, over four months after the April 1st deadline.  Most of the Budget’s provisions are effective as of January 1, 2010.  The most significant provisions in the Budget are as follows:

Affecting Individuals

  • creates a new top marginal New York City personal income tax rate of 3.876% for New York City residents with taxable income over $500,000;
  • reduces the charitable deduction that may be claimed by New York State residents earning more than $10 million from 50% of the U.S. Federal deductible amount to 25%;
  • imposes New York State tax on payments (including non-compete and termination payments) to non-residents in respect of services previously performed in New York State;
  • in the case of an S corporation that was doing business in New York, imposes New York State tax on a non-resident shareholder’s gain from (i) a share sale treated, for U.S. Federal tax purposes, as an asset sale, or (ii) an installment sale of the S corporation’s assets followed by a liquidation of the S corporation or a termination of its New York State tax status; and
  • preserves the $1 million New York estate tax exemption for decedents dying in 2010 during the temporary repeal of the U.S. Federal estate tax.

Affecting Corporations

  • imposes a temporary deferral on the use of certain tax credits for taxable years beginning on or after January 1, 2010 and ending on or before December 31, 2012;
  • re-couples the New York State and New York City bad debt deduction methods to the Federal method for banks and certain other financial institutions;
  • eliminates sales tax refunds or credits on unpaid private label credit card debts;
  • requires a “payment settlement entity” that is obligated to file U.S. Federal information reports under a new U.S. Federal law to file duplicate reports with New York State; and
  • makes the captive REIT/RIC provisions permanent.

The version of the Budget initially passed by the New York State legislature (on August 3rd) included a provision that would have imposed New York State tax on profits allocated to a non-resident partner in respect of a partnership carried interest (or other similar interest in a partnership or S corporation) if the non-resident performed investment management services for the partnership (or S corporation) in New York State.  On the same day that this provision was enacted, it was repealed by a Governor’s “program bill”.  Thus, the provision is not part of the law as enacted.