S Corporations in NYS: Planning For Changes to the NYS 2014/2015 Budget
By Diane Giordano, Partner, Tax & Business Services
The 2014/2015 NYS Budget was signed by Governor Cuomo and became effective on April 1, 2014. The Budget includes many provisions effecting NYS companies such as rate reductions, changes to alternative minimum tax, new fix dollar minimums and changes to nexus standards.
There are some specific programs which may require taxpayers to evaluate the real estate property taxes and the company choice of entity.
One of the important provisions of the Budget is the creation of a new credit effective January 1, 2014, equal to 20% of real property taxes paid by a qualified NY manufacturer. The credit is available to C Corporations and Flow through entities. Properties already involved in PILOT programs or other programs in which real property tax is used to compute a credit are excluded from this program.
The credit is also allowed for property taxes paid on real property leased from an unrelated third party if the taxes are paid pursuant to explicit requirements in a written lease and remitted directly to the taxing authority. The corporate franchise tax credit can reduce tax to $25 while the personal tax credit is refundable. A taxpayer that claims the credit must add back to taxable income any amount of real property taxes deducted at the federal level.
Taxpayers involved in other real property tax programs may need to evaluate the other programs and compare those to the new 20% reduction program.
Under the new Budget, the state now defines “manufacturer” as a taxpayer or combined group with more than 50% of gross receipts from the sale of goods produced by manufacturing. (Manufacturing excludes power generation and distribution, natural gas extraction and distribution, co-generated steam, film/TV/commercial production and fuel blending.) A “qualified New York manufacturer” is a taxpayer or combined group that is a manufacturer with either at least $1 million in state capital (manufacturing property) or 100% of its manufacturing property in NYS; or a taxpayer with 2,500 manufacturing employees and $100 million in manufacturing property in-state.
One of the key provisions of the Budget is the reduction of the Article 9-A entire net income tax rate to zero, effective 1/1/14, for qualified NY manufacturers statewide. This provision is deemed to be a major boon to businesses, especially in the upstate regions. This rate reduction only applies to taxpayers which are regular "C" corporations, and does not apply to "S" corporations or limited liability companies. The current legislation does not address the availability of a zero tax rate to flow- through entities such as New York S Corporations or entities taxed as partnerships. To qualify for the corporate income tax elimination available to manufacturers, non C corporation companies would have to restructure.
For those NYS manufacturing companies operating as an S Corporation, shareholders need to evaluate if electing to be treated as a C corporation for NYS purposes in order to take advantage of the zero tax rate is preferable to remaining an S corporation. Many factors need to be considered in order to make this decision such as income projected, distributions planned, other state programs in effect, other states’ filings and state credits along with the age of the owners and basis in the company.
For those business owners of NYS S corporations, we suggest you contact your Marcum Tax Professional to discuss the possibility of converting to a C corporation and if this change makes sense for your company.