New York Budget Proposal Amended to address Federal Changes from 2017 Tax Act

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Overview

New York recently amended its FY19 budget proposal to address the recent U.S. tax changes enacted at the end of 2017. The amendments include: first, the creation of an optional 5 percent “employer compensation expense tax” (“ECET”); and second, the creation of two new state-operated charitable funds, the contributions to which would be 85 percent creditable against the state income tax. Both of these provisions are the responses to federal provisions limiting to $10,000 the personal income tax deduction for state and local taxes.

In brief

The ECET would be imposed on the payroll expense paid by electing employers to covered employees during the calendar quarter at the rate of 1.5 percent in 2019, 3 percent in 2020, and 5 percent in 2121 and thereafter. The ECET would apply only on the payroll expense paid during the calendar year in excess of $40,000. Employers would be prohibited from deducting from an employee’s wages or compensation any amount that represents the ECET. 

The 30-day amendments proposed the creation of a new charitable gifts trust fund and beginning in 2019, individual taxpayers would be allowed a personal income tax credit in the amount of 85 percent of the amounts contributed to these accounts during the previous tax year. The proposals outline procedures for local governments to set up applicable charitable funds and would authorize local governments to also offer property tax credits for fund contributions. 

In addition, the proposal would require taxpayers to add back the deduction under IRC Section 965(c) related to the new federal deemed repatriation toll charge provisions. Furthermore, the proposal would exempt from estimated tax underpayment penalty (1) disallowed interest expenses attributed to exempt CFC income or (2) the 40 percent reduction of such exempt CFC income in lieu of interest attribution (i.e., the safe harbor election). Both provisions would apply to tax years beginning on or after January 1, 2017, and before January 1, 2018.

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