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Corporate Tax Reform FAQs

These FAQs are meant to provide general guidance on topics of interest to taxpayers. However, taxpayers should be aware that subsequent changes in the Tax Law or its interpretation may affect the accuracy of an FAQ. The information provided in these FAQs does not cover every situation and is not intended to replace the law or change its meaning. These FAQs clarify corporate tax reform legislative amendments that take effect for taxable years beginning on or after January 1, 2015, unless otherwise stated.

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Apportionment

Q: How is interest income on funds deposited with the Federal Reserve (other than federal funds) apportioned?
A: Receipts from interest income on funds deposited with the Federal Reserve (other than federal funds) are considered receipts from other financial instruments under Tax Law section 210-A.5(a)(2)(H) and apportioned to the payor’s location, which is the location of the Federal Reserve branch where the corporation made the deposit.
Q: How is interest income from a loan that is secured by property located inside and outside of New York apportioned?
A: The loan is considered a loan secured by real property if 50% or more of the fair market value of the collateral used to secure the loan consists of real property. All the interest income from a loan secured by real property located in New York is apportioned to New York State.  If the loan is secured by real property located inside and outside of New York State, the amount of interest income apportioned to New York is computed by multiplying the total interest income from the loan by the following ratio:

                                    Fair Market Value of Real Property Located in New York Used to Secure the Loan
                                                 Fair Market Value of all Real Property Used to Secure the Loan

Interest income from loans not secured by real property is apportioned to New York if the borrower is located in New York. An individual is considered located in New York if the individual’s mailing address is in New York. A business entity is considered located in New York if the entity’s commercial domicile is in New York.

The determination of the type of loan, fair market value of real property, and borrower’s location is made at the time the loan is entered into. If the loan is refinanced at a later date, you must redetermine the type of loan and the amount of income to apportion to New York.

Q: How is interest income on deposits apportioned to New York?
A: Receipts from interest income on deposits are considered receipts from other financial instruments under Tax Law section 210-A.5(a)(2)(H) and sourced to the payor’s commercial domicile.
Q: Why did I receive a notice and demand statement (bill) for additional franchise tax due, computed using a 100% Business Apportionment Factor, for my corporation’s 2015 corporate franchise tax return?
A: You may have received a bill for additional tax due because you did not properly complete the Computation of business apportionment factor section (Part 6, of Form CT-3 and Form CT-3-A, or Part 3 of Form CT-3-S) of your franchise tax return. The Tax Department reconciles and computes the tax due on all corporate franchise tax returns filed with the Department.  If the Tax Department receives a tax return that does not have the Computation of the business apportionment factor properly completed, it will, in certain instances, compute a business apportionment factor of 100% and adjust the tax due accordingly. It is generally not acceptable to report a zero value, write none, or leave the field blank for the Everywhere Receipts reported on line 54 in the Computation of the business apportionment factor section of your return.

The following situations will result in the Tax Department re-computing your tax due using a business apportionment factor of 100%:

  • Reporting no receipts information in the Computation of the business apportionment factor section of your CT-3, CT-3-S, or CT-3-A return (e.g. writing NONE or leaving the section blank);

  • Reporting zero everywhere receipts on line 54 of Part 6 on your CT-3, CT-3-A, or Part 3 of your CT-3-S; or

  • Electing separate accounting treatment for a limited partnership (under 20 NYCRR 3-13.5) but failing to complete the Computation of the business apportionment factor section of your CT-3 or CT-3-S to report only your distributive share of the limited partnership’s NYS receipts and everywhere receipts sourced in accordance with Article 9-A sourcing rules set forth in Tax Law §210-A. (For more information on how to properly make the election, see Foreign corporate limited partners - separate accounting election).

You must either pay the additional tax due amount on the notice and demand statement you received, or amend your franchise tax return to properly compute your business apportionment factor and tax due amount.

When amending your tax return, you must source and report the amount of your receipts, net income, net gains, and other items (including your distributive share of such receipts, net income, net gains, and other items from a partnership) in accordance with Article 9-A sourcing rules set forth in Tax Law §210-A.  Include in the numerator and denominator of the business apportionment fraction only the receipts, net income, net gains (not less than zero), and other applicable items described in Tax Law §210-A that are earned in the regular course of business and included in your business income determined without regard to the amount subtracted on Part 3, line 6 (subtraction modification for qualified banks), and without regard to any amount from investment capital that is determined to exceed the 8% of ENI limitation on gross investment income.


Business Capital

Q. Does business capital include the capital that generates other exempt income?
A. Yes, because this capital may also generate taxable business income, such as capital gains from the sale of stock in a unitary corporation that is not included in a combined report with the taxpayer.

Business Income Base

Q. Are Internal Revenue Code Section 78 gross-up dividends included in the business income base?
A. Our current policy of excluding these dividends is being continued. See NYS Tax Law section 208.9(a)(6).
 
Q. What constitutes a small business for determining whether a small thrift or community bank has made a "small business loan" for purposes of the subtraction modification under Tax Law section 208.9(s)?
A. A loan will be considered a "small business loan" if made to an active business that has had, for federal income tax purposes, an average number of full-time employees of 100 or fewer, not including general executive officers, and gross receipts of not greater than $10,000,000 in its immediately preceding taxable year. In the event that the entity applies for the loan in its first year of operations, satisfaction of the requirements in the preceding sentence is determined by the employees, receipts and assets of the business on the date of the loan application. In addition, the business may not be part of an affiliated group, as defined in section 1504 of the Internal Revenue Code, unless the group would have itself met, as a group, the active business, employee and the gross-receipts requirements.  A business qualifies as an active business if the value of the financial instruments described in Tax Law section 210-A.5, that it holds for investment does not exceed 50% of the value of its total assets. A loan made to an entity which meets these requirements to be a small business at the time of the filing of the loan application, is deemed to be a small business loan throughout the term of such loan.
 
Example A:
 
A retail clothing business submits an application for a loan from a community bank on February 1, 2016. The bank determines that during the 2015 tax year the business had an average number of 30 employees, and that for the same tax year the business's gross receipts were $3,000,000 and its assets consisted entirely of inventory and working capital. The bank further determines that the business is not part of an affiliated group. The loan is a "small business loan" for purposes of the subtraction modification under Tax Law section 208.9(s).
 
Example B:
 
The business in example A submits an application for a loan from the same community bank on February 1, 2017. The bank determines that during the 2016 tax year the business had an average number of 40 employees, and that for the same tax year the business's gross receipts were $4,000,000. The bank further determines that for the 2016 tax year the business was part of an affiliated group; and that during that tax year the members of the affiliated group together had an average number of 90 employees, and that for the same tax year the members of the group's total gross receipts were $9,000,000. The loan to the business is a "small business loan" for purposes of the subtraction modification under Tax Law section 208.9(s).
 
Example C:
 
A limited partnership submits an application for a loan from a community bank on February 1, 2017. The bank determines that during the 2016 tax year, the partnership had no employees and its gross receipts were $2,000,000 for the year. The bank also determines that its assets consist of corporate stock that has a value equal to $40 million and land that has a value equal to $10 million. The partnership holds the corporate stock for investment. The loan to the partnership does not qualify as a "small business loan" for purposes of the subtraction modification under Tax Law section 208.9(s).
Q. For purposes of the entire net income subtraction modification for community banks and small thrifts (Tax Law section 208(9)(s)), what does the term "residential mortgage loan" mean as it is used in the definition of a "qualifying loan"?
A. For this modification, a "residential mortgage loan" is a loan which meets the definition of an asset as described in Tax Law section 208(9)(r)(2)(A)(iv). Accordingly, a residential mortgage loan is: 
  • a loan secured by an interest in real property which is (or from the proceeds of the loan, will become) residential real property or real property used primarily for church purposes, or
  • a loan made for the improvement of residential real property or the improvement of real property used primarily for church purposes.

Residential real property includes single or multi-family dwellings, facilities in residential developments dedicated to public use or property used on a nonprofit basis for residents, and mobile homes not used on a transient basis.

Capital Loss

Q. Can a taxpayer carry back a net capital loss to a tax year beginning before January 1, 2015?
A. Net capital losses can be carried back three years. However, net capital losses earned in 2015 or later cannot be carried back to a tax year that begins before 2015.

Combined Reporting

Q. Will New York State consider a corporation instantly unitary with a taxpayer when acquired?
A. It is a facts and circumstances determination upon acquisition.
 
Q. How is the commonly owned group election made?
A. The election is made on the original return of the combined group that is timely filed (including valid extensions of time for filing). There will be an indicator on the combined return for this election.
 
Q. Are nontaxpayer members of a combined group subject to the fixed dollar minimum tax?
A. No.
 
Q. Are nontaxpayer members of a unitary group that meet the ownership requirements under Tax Law section 210-C required to be included in a combined report?  New posting
A. Yes, except for the following corporations that may not be included in a combined report. Those corporations are:
  •  a corporation that is taxable under a franchise tax imposed by Article 9 or Article 33 or that would be taxable under a franchise tax imposed by Article 9 or Article 33 if subject to tax;
  • a REIT that is not a captive REIT (other than with its qualified REIT subsidiary)*;
  • a RIC that is not a captive RIC*;
  • a New York S corporation;
  • an alien corporation that is not treated as a "domestic corporation" as defined in section 7701 of the IRC and has no effectively connected income, gain, or loss for the taxable year pursuant to New York State Tax Law section 208(9)(iv);
  • an alien corporation that is not treated as a "domestic corporation" as defined in section 7701 of the IRC, where such corporation has income all of which is exempt from federal taxable income under a U.S. treaty obligation, and in the absence of such exemption would have no effectively connected income, gain, or loss for the taxable year pursuant to New York State Tax Law section 208(9)(iv); and
  • a corporation subject to tax solely because it is a limited partner of a limited partnership with receipts or activities in New York, and none of the corporation's related corporations are subject to tax under Article 9-A.

 * Except as specified, this FAQ does not address the potential combination of REITs and RICs with their subsidiary corporations.

 Q. How are the activities of unitary corporations reported on a combined report, when the capital stock requirement is met for only part of a tax year?
 A. The unitary corporations’ activities conducted during the portion of the tax year that the capital stock requirement is met are included in the combined report.
 
Example:
 
Corporation A owns 60% of the voting power of the capital stock of Corporation B, 70% of the voting power of the capital stock of Corporation C, and 55% of the voting power of the capital stock of Corporation D. The corporations are unitary and are calendar-year taxpayers. Corporation A sells its entire investment in Corporation B on June 19, 2015, to Corporation E. Corporation B is not unitary with Corporation E. Corporations B, C, and D are subject to tax in New York. Corporations A and E are not New York taxpayers.
 
Corporations A, B, C, and D are required to file a combined return for the period January 1, 2015 through December 31, 2015. The business activities of Corporation B are required to be included in that combined return only for the period January 1, 2015 through June 19, 2015. Corporation B is required to file a separate New York corporation tax return for the short period June 20, 2015 through December 31, 2015. Corporation E is not required to file a New York State corporate tax return.
 
Q.  Is the capital of a captive REIT, captive RIC, or combinable captive insurance company included in the computation of a combined group’s capital base?
A. Yes.
Q. When is a fiscal-year corporation that is a member of a combined group included in a combined report with its designated agent that files as a calendar-year taxpayer? What is the rule when the designated agent is a fiscal-year filer and the member is a calendar-year filer?
A. Generally, a corporation with a fiscal tax year may be included in a combined report with a calendar-year taxpayer. The applicable tax year of the taxpayer to be included in the combined group is the tax year that ends within the tax year of the designated agent for the group.

However, any corporation with a fiscal tax year that begins in 2014 and ends in 2015 cannot be included in a combined report with any other corporation that has a tax year beginning on or after January 1, 2015. Fiscal-year taxpayers must file a separate tax return from that of its designated agent for a tax year that began in 2014 and ends in 2015, if the designated agent's tax year begins on or after January 1, 2015. A fiscal-year taxpayer may be included in a combined report with its designated agent starting with its first fiscal year that begins on or after January 1, 2015.

Example A:

An Article 32 taxpayer has a fiscal tax year that ends on September 30. The taxpayer is a member of a combined group whose designated agent has a calendar tax year ending on December 31. The Article 32 taxpayer is still subject to tax under Article 32 for its 2014-2015 fiscal tax year, and must separately file Form CT-32 for its fiscal tax year that runs from October 1, 2014 through September 30, 2015. For its fiscal tax year that begins on October 1, 2015 and ends on September 30, 2016, the former Article 32 taxpayer is included in the designated agent's Article 9-A combined report filed for the tax year that begins on January 1, 2016 and ends on December 31, 2016.

Example B:

An Article 9-A taxpayer with a fiscal tax year that ends on June 30 is a member of a combined group with a calendar tax year ending on December 31. The taxpayer must separately file Form CT-3 for its fiscal tax year that runs from July 1, 2014 to June 30, 2015, and may not be included in the designated agent's combined report for the tax year that begins on January 1, 2015 to December 31, 2015. The fiscal tax year that begins on July 1, 2015 and ends on June 30, 2016 is included in the designated agent's combined report for the tax year that runs January 1, 2016 through December 31, 2016.

Example C:

The designated agent of a combined group has made a commonly owned group election under Tax Law section 210-C.3 (seven year election) for its 2015 calendar tax year. It owns more than 50% of an affiliated corporation that is an Article 9-A fiscal-year taxpayer with a tax year that ends on March 31. The affiliated corporation must separately file Form CT-3 for its fiscal tax year that runs from April 1, 2014 through March 31, 2015. For its fiscal tax year that begins on April 1, 2015 and ends on March 31, 2016, the affiliated corporation is included in the designated agent's combined report for the tax year that begins on January 1, 2016 and ends on December 31, 2016.

Example D:

Corporation A, an Article 9-A taxpayer with a calendar tax year that ends on December 31, is a member of a combined group whose designated agent is Corporation B that has a fiscal tax year that ends on June 30. Corporation A has a short period that begins on January 1, 2015 and ends on March 31, 2015. Corporation A must file a separate Form CT-3 for its short tax year that runs from January 1, 2015 to March 31, 2015, and may not be included in Corporation B’s combined report for the tax year that begins on July 1, 2014, and ends on June 30, 2015. Corporation A’s short period that begins on April 1, 2015 and ends on December 31, 2015, is included in Corporation B’s combined report from July 1, 2015 to June 30, 2016.

Q. Are members of a combined group required to file a separate extension of time to file?
A. The designated agent of a newly formed or pre-existing combined group must file one Form CT-5.3, Request for Six-Month Extension to File (for combined franchise tax return, or combined MTA surcharge return, or both), to request an extension of time to file for all corporations included in the combined group, including taxpayer members being added to an existing combined group.
  • Taxpayer members being added to an existing combined group must each also file a separate Form CT-5, Request for Six-Month Extension to File, to extend the first period they are included in the combined group. A separate Form CT-5 must also be filed by each taxpayer member to extend the short period beginning immediately prior to the date it joined the combined group.

  • Taxpayer members that are forming a new combined group must each also file a separate Form CT-5, to extend the first period they are included in the combined group. A separate Form CT-5 must also be filed by each taxpayer member to extend the short period beginning immediately prior to the date the combined group was formed.

  • No payment is required with Form CT-5 filed by taxpayer members being added to an existing combined group and taxpayer members that are forming a new combined group to extend the first period they are included in the combined group. However, the fixed dollar minimum tax for each member must be included in the combined group’s payment made with the designated agent’s Form CT-5.3.

  • Non-taxpayer members of a combined group are never required to file a separate Form CT-5, regardless of whether they are included on Form CT-5.3.

A designated agent of a newly formed or pre-existing combined group must also follow the rules specified above when filing a Form CT-5.1, Request for Additional Extension of Time to File. Taxpayer members being added to the existing combined group and taxpayer members forming such new combined group must also follow the applicable instructions above but are required to file a separate Form CT-5.1 in these specific instances rather than a separate CT-5.    

NOTE:  For the 2015 tax year, Form CT-5.3 for a combined group will be treated as valid if all of the corporations included in the 2015 combined group are listed on a timely filed Form CT-5.3, whether or not Form CT-5 has been filed in accordance with the instructions above.

Additionally, for tax year 2015, a timely filed Form CT-5.1 for a combined group will also be treated as valid for all of the corporations included in the 2015 combined group regardless of whether or not Form CT-5.1 has been filed for each member in accordance with the instructions above.

Q. When will an alien corporation that generated income, gain, or loss that is effectively connected with the conduct of its trade or business in the United States be included in a combined report?  New posting
A.  If an alien corporation has income, gain, or loss that is effectively connected with its U.S. trade or business (ECI), the alien corporation must be included in a combined report with a taxpayer if it meets the combined reporting requirements in Tax Law section 210-C. Such a corporation will be included in a combined report regardless of whether or not it is itself a New York taxpayer. 

An alien corporation that has no income, gain, or loss that is effectively connected with its U.S. trade or business and is also not treated as a “domestic corporation” as defined in section 7701 of the Internal Revenue Code (IRC) is not includable in a combined report.  Such a corporation is not includable in a combined report even if it would otherwise be subject to tax under New York’s nexus rules.

Example A:

Alien corporation A, which has ECI for the 2017 tax year, conducts its business in a state other than New York and is not engaged in any of the activities listed in Tax Law section 209(1)(a).  Therefore, it is not subject to tax in New York.  However, since alien corporation A has ECI, it must be included in a combined report with a taxpayer for the 2017 tax year if it meets the combined reporting requirements in Tax Law section 210-C.

Example B:

Alien corporation B has no ECI for the 2017 tax year and is not treated as a “domestic corporation” as defined in section 7701 of the IRC.  Although it owns an apartment in New York City, alien corporation B is not includable in a combined report for the 2017 tax year, because it has no effectively connected income, gain, or loss from a U.S. trade or business for such tax year.

Example C

All of alien corporation C’s income is exempt from federal taxable income under a U.S. treaty obligation and would be treated as ECI for the 2017 tax year in the absence of the treaty.  For New York State tax purposes, effectively connected treaty income is required to be included in entire net income.  Therefore, alien corporation C must be included in a combined report with a taxpayer for the 2017 tax year if it meets the combined reporting requirements in Tax Law section 210-C, regardless of whether or not alien corporation C is subject to tax under New York’s nexus rules.

Credit Carryforwards

Q. How does corporate tax reform affect credit carryforwards from years prior to 2015?
A. Other than a carryforward of the minimum tax credit, which was not re-enacted in corporate tax reform, the credit carryforward provisions were not changed. Any credit carried forward from a year prior to corporate tax reform may continue to be carried forward and used against the tax imposed in tax years 2015 and after, under the same rules that applied prior to reform.
  • Credits with carryforwards of unlimited duration can continue to be carried forward until used.
  • Credits with carryforwards of a limited duration can be carried forward and used until their expiration.
Example:

A taxpayer earned a $3,000 investment tax credit in 2013 that has a 15-year carryforward duration. The taxpayer used $400 in 2013 and $200 in 2014. The unused credit carryforward of $2,400 may continue to be carried forward until 2028, or whenever it is completely used, whichever comes first.

Empire Zone (EZ)/Qualified Empire Zone Enterprise (QEZE) Credits

Q. Does corporate tax reform affect the EZ and QEZE Credits?
A. With the exception of the minimum tax credit, which was not re-enacted in corporate tax reform, no eligibility requirements were changed for any tax credits. Thus, to the extent an Empire Zone certified business is eligible, the business may continue to claim the EZ and QEZE credits during its business tax benefit period.

Taxpayers may also continue to use allowable carryforwards of credits.

Estimated Tax

Q. For purposes of the exceptions to the underpayment of estimated tax penalty, how does an Article 9-A taxpayer determine if it is a large corporation?
A. A large corporation is one that had, or whose predecessor had, business income or allocated business income of at least $1 million for any of the three tax years immediately preceding the tax year for which the exception is being sought. However, if any of those three preceding tax years began prior to January 1, 2015, entire net income (ENI) or the portion of ENI allocated within New York State under Article 9-A or Article 32, as in effect in those years and as applicable, should be used in lieu of business income for those tax years.
Q. How does the designated agent of a newly formed combined group make the 2nd, 3rd and 4th estimated tax payments for the group?
A. The designated agent may submit a single payment under its employer identification number for the entire group using Form CT-400, Estimated Tax for Corporations. In addition, although it is not required, we recommend that the designated agent of the newly formed combined group file Form CT-51, Combined Filer Statement for Newly Formed Groups Only, to expedite the recording of the group’s information prior to the due date of the combined franchise tax return.

Interest Attribution

Q. If a taxpayer makes the election to reduce its investment income and other exempt income by 40% in lieu of attributing interest expense to investment income and other exempt income, can DTF override the election and require attribution?
A. No. The Department is bound to follow the taxpayer’s election.

Investment Capital

Q. Is the 20% ownership presumption regarding a unitary relationship for purposes of determining exempt investment income a rebuttable presumption?
A. The 20% ownership presumption is rebuttable. If the Tax Department chooses to rebut the presumption, the burden will fall on the Department to demonstrate that the less than 20% owned subsidiary is unitary with the taxpayer.
 
Q. The definition of investment capital includes a debt obligation or other security if its income or gain cannot be apportioned to the state as business income as a result of U.S. constitutional principles. Will DTF issue guidance outlining the items it cannot constitutionally apportion as business income?
A. No. Under U.S. Supreme Court case law, a state cannot treat an item of income of a taxpayer subject to tax in the state as apportionable business income if the state does not have constitutional nexus with that item of income. DTF will not attempt to offer guidance beyond existing Supreme Court case law as to how this constitutional doctrine would apply under particular facts and circumstances.

Metropolitan Transportation Business Tax (MTA Surcharge)

Q. Is the Article  9-A MTA Surcharge applicable to all tax bases?
A. Yes. For the 2015 tax year, the MTA Surcharge applies to the highest of the tax before credits on the business income base, capital base, or the fixed dollar minimum tax.
Q. Is the Article 9-A MTA Surcharge applicable to qualified New York State manufacturers?
A. Yes.

Net Operating Loss (NOL)

Q. Can a taxpayer carry back a net operating loss to a tax year beginning before January 1, 2015?
A. NOLs can be carried back 3 years. However, an NOL earned in 2015 or later cannot be carried back to a tax year before 2015.
Q. When filing an amended NYS Article 9-A corporate tax return to carry back a New York State net operating loss incurred in a tax year beginning on or after January 1, 2015, to a tax year that began on or after January 1, 2015, what do I need to attach to my amended return?  
A. For tax years beginning on or after January 1, 2015, you only need to attach a copy of the return previously filed with NYS for the loss year and Form CT-3.4, Net Operating Loss Deduction (NOLD). You do not need to include a copy of a federal claim Form 1139, Corporation Application for Tentative Refund, or federal Form 1120X, Amended U.S. Corporation Income Tax Return, and proof of federal refund approval, Statement of Adjustment to Your Account.

For tax years beginning on or after January 1, 2015, the Article 9-A corporate franchise tax treatment of net operating losses does not conform to the federal treatment of net operating losses and deductions. Therefore, proof of a federal refund claim and federal refund approval is not required for these tax years.

Nexus

Q. Does the economic nexus provision impose tax on franchisors that sell goods and services, or licenses, to franchisees located in New York State?
A. Businesses that exercise a corporate franchise, do business, employ capital, own or lease property, maintain an office, or derive receipts (of $1 million or more in a tax year) from activity conducted in New York will be subject to tax for that tax year. Franchisors that sell goods and services, or licenses, to franchisees located in New York State are not specifically exempt from tax. Therefore, they are subject to the same tax provisions as any other corporation that conducts activities in New York State.
 
In addition, businesses that exercise a corporate franchise, do business, employ capital, own or lease property, or maintain an office in the Metropolitan Commuter Transportation District (MCTD), or derive receipts (of $1 million or more in a tax year from activity in the MCTD) are subject to the metropolitan transportation business tax (MTA surcharge).
 
Q. For purposes of determining nexus, is the $1 million or more in receipts within New York State test computed annually?
A. Yes.
 
Q. For purposes of determining nexus for partnerships and for limited liability companies (LLCs) that are treated as partnerships, is the $1 million or more in receipts within New York State test applied at the partnership and the LLC level or at the corporate partner and the LLC corporate member level?
A. Generally, the test is determined by combining the corporate partner’s receipts in NY with the partnership’s receipts in NY; and by combining the corporate member’s receipts in NY with the LLC’s receipts in NY. There will be nexus:
  • for a general corporate partner if its receipts in NY, if any, when combined with the receipts in NY of the partnership total at least $1 million;
  • for a limited corporate partner that is engaged, directly or indirectly, in the participation in or the domination or control of all or any portion of the business activities or affairs of the partnership if its receipts in NY, if any, when combined with the receipts in NY of the partnership total at least $1 million;
  • for an LLC corporate member whose participation in the management of the LLC is not limited by the LLC’s operating agreement if the corporate member’s receipts in NY, if any, when combined with the receipts in NY of the LLC total at least $1 million; and
  • for an LLC corporate member whose participation in the management of the LLC is limited by the LLC’s operating agreement and that is engaged, directly or indirectly, in the participation in or the domination or control of all or any portion of the business activities or affairs of the LLC if its receipts in NY, if any, when combined with the receipts in NY of the LLC total at least $1 million.

This general rule is subject to the following exception: The receipts in NY of corporate partners of portfolio investment partnerships and corporate members of LLCs that are treated as portfolio investment partnerships are not combined with the receipts in NY from such partnerships or LLCs for purposes of determining economic nexus.

Example A:

Partnership A has two general corporate partners: Partner B which owns 60% of the partnership and Partner C which owns 40%. Partnership A has $600,000 of receipts in NY. Separately, Partner B has $700,000 of receipts in NY and Partner C has $450,000 of receipts in NY.
 
For purposes of determining nexus only, both corporate partners B and C would be treated as having $600,000 of receipts in NY from the partnership. Combined with their own receipts, both general corporate partners exceed $1 million in receipts in NY ($1,300,000 for Partner B and $1,050,000 for Partner C). Therefore, both general corporate partners are subject to tax.

Example B:

Partnership D is a limited partnership and has one general corporate partner and two limited corporate partners: the limited corporate partners are Partner E and Partner F. Partnership D has $950,000 of receipts in NY. Separately, Partner E and Partner F each have $75,000 of receipts in NY.

Partner E is not engaged, directly or indirectly, in the participation in or the domination or control of all or any portion of the business activities or affairs of the partnership. Partner F is directly engaged in the participation in the business affairs of the partnership.

For purposes of determining nexus only, Partner F would be treated as having $950,000 of receipts in NY from the partnership, since it is directly engaged in the participation in the business affairs of the partnership. (Partner E would not be treated as having any receipts in NY from the partnership, since it is not engaged, directly or indirectly, in the participation in or the domination or control of all or any portion of the business activities or affairs of the partnership.) Combined with its own receipts, Partner F exceeds $1 million in receipts in NY ($1,025,000). Therefore, Partner F is subject to tax.

Example C:

Limited Liability Company G, which is treated as a partnership, has several corporate members and has $1,250,000 of receipts in NY. Separately, Member H has no receipts in NY. The LLC’s operating agreement does not impose limitations on the participation of Member H in the management of the LLC.

For purposes of determining nexus only, Member H would be treated as having $1,250,000 of receipts in NY from the LLC. With no receipts in NY of its own, Member H nevertheless exceeds $1 million in receipts in NY ($1,250,000). Therefore, Member H is subject to tax.

Example D:

Limited Liability Company J, which is treated as a partnership, has several corporate members and has $750,000 of receipts in NY. Separately, Member K has $500,000 of receipts in NY and Member L has $300,000 of receipts in NY. The LLC’s operating agreement imposes limitations on both Member K’s and Member L’s participation in the management of the LLC.

Member K is not engaged, directly or indirectly, in the participation in or the domination or control of all or any portion of the business activities or affairs of the LLC. Member L is indirectly engaged in the control of the business activities of the LLC.

For purposes of determining nexus only, Member L would be treated as having $750,000 of receipts in NY from the LLC, since it is indirectly engaged in the control of the business activities of the LLC. (Member K would not be treated as having any receipts in NY from the LLC, since it is not engaged, directly or indirectly, in the participation in or the domination or control of all or any portion of the business activities or affairs of the LLC.) Combined with its own receipts, Member L exceeds $1 million in receipts in NY ($1,050,000).  Therefore, Member L is subject to tax. 
 
Q. Do the new economic nexus rules apply to S corporations?
A. Yes. The new economic nexus rules apply to S corporations. If the S corporation makes an election to be treated as a New York S corporation under Tax Law section 660(a), the New York S corporation is subject only to the fixed dollar minimum tax. If the S corporation does not make that election, the corporation is subject to tax under Article 9-A as a New York C corporation. 
 
Q. How are New York receipts determined for purposes of the economic nexus receipts threshold for members of a unitary group?
A. If the total New York receipts of the unitary group are $1 million or more, the unitary group  has met the economic nexus threshold. When determining whether this threshold is met, only receipts from corporations conducting a unitary business that meet the ownership requirements under Tax Law section 210-C*, with at least $10,000 in New York receipts, are aggregated.
 
*except corporations that may not be included in a combined report due to the exclusions in Tax Law section 210-C.2(c), such as insurance corporations
 
Example:
 
Corporations A, B, C, and D are conducting a unitary business and meet the ownership requirements under Tax Law section 210-C. Corporation A has $500,000 in New York receipts. Corporation B has $700,000 in New York receipts. Corporation C has $1800 in New York receipts. Corporation D has $50,000 in New York receipts and is subject to tax under Article 33. Even though Corporation D's New York receipts are more than $10,000, its receipts are not included in the computation since it is not allowed to be included in a combined report under Tax Law section 210-C.2(c). Receipts from Corporation C are excluded from the calculation since members of a unitary group with less than $10,000 are not included when determining whether the $1,000,000 threshold is met. Therefore, the Article 9-A unitary group of A, B, and C have New York receipts that total $1,200,000 for purposes of the economic nexus threshold. Since Corporations A and B have aggregate receipts in excess of $1 million, the unitary group of A, B and C meets the economic nexus test.
 
Generally, a unitary group that meets the ownership requirements under section 210-C of the Tax Law is required to file a combined report. In this example, A, B and C are required to file  a combined report. For purposes of the combined report, Corporations A and B are taxpayers.  Either A or B may be the designated agent of the combined report. Any taxpayer that is not the designated agent is subject to the fixed dollar minimum tax.   C is not a taxpayer and therefore is not subject to the fixed dollar minimum tax. 
 
Q. What is the impact of Public Law 86-272 on a unitary group required to file a combined report due to the economic nexus receipts threshold?
A. Any corporation in a unitary group with at least $10,000 in New York receipts is considered a taxpayer, unless protected by Public Law 86-272. The activities and income of a corporation that is part of a unitary group but protected by Public Law 86-272 must be included in the combined report. However, the corporation is not considered a taxpayer and therefore is not subject to the fixed dollar minimum tax. If all the members of the unitary group are protected by Public Law 86-272, no members of the unitary group are considered taxpayers. This unitary group would not be required to file a combined report.
Q. Is a foreign corporation organized as a bank in another state that has interest income solely from federal funds sourced to New York State under the statutory 8% rule but no other apportionable New York receipts “deriving receipts” in New York?  
A. No, this foreign corporation is not considered to be deriving receipts in New York State.
Q. Is an alien corporation that conducts a trade or business in New York taxable under the Business Corporation Franchise Tax and could it be included in a combined report in a tax year that generates a loss that is effectively connected with the conduct of its trade or business in the U.S.?
A. Yes. If an alien corporation has income, gain, or loss that is effectively connected with a U.S. trade or business, conducted in New York, it is considered a taxpayer under the Business Corporation Franchise Tax. If an alien corporation has income, gain, or loss that is effectively connected with a U.S. trade or business, it is subject to the requirements of a combined report.
Q.  Is an alien corporation that had income all of which is exempt from federal taxable income under a U.S. treaty obligation, but where the terms of the treaty permit state taxation of such income, taxable under the Business Corporation Franchise Tax?  New posting
A. Yes. An alien corporation not treated as a “domestic corporation” under section 7701 of the Internal Revenue Code that has treaty-exempt income is taxable under the Business Corporation Franchise Tax, if such income would be treated, in the absence of the exemption, as effectively connected with its U.S. trade or business and the corporation is subject to tax under New York’s nexus rules, listed in Tax Law section 209.

In such a circumstance, the full amount of the alien corporation’s treaty-exempt income must be added back to the corporation’s entire net income.

Q. Is an alien corporation that generated a net loss that is effectively connected with the conduct of its trade or business in the United States taxable under the Business Corporation Franchise Tax?   New posting
A. The term effectively connected income encompasses a loss as well as income and gain.  An alien corporation that has income, gain, or loss that is effectively connected with its U.S. trade or business and is also subject to tax under New York’s nexus rules will be considered a taxpayer under the Business Corporation Franchise Tax.  If such a corporation conducts its trade or business in New York, then it will be subject to tax in New York.  If such a corporation conducts its trade or business elsewhere in the United States but is engaged in one or more of the activities listed in Tax Law section 209(1)(a), then it will be subject to tax in New York.

An alien corporation that has no income, gain, or loss that is effectively connected with its U.S. trade or business and is also not treated as a “domestic corporation” as defined in section 7701 of the Internal Revenue Code will not be considered a taxpayer under the Business Corporation Franchise Tax even if such corporation would otherwise be subject to tax under New York’s nexus rules.

Example A:

An alien corporation has a net loss that is effectively connected with its U.S. trade or business for the 2017 tax year.  Such corporation does business in New York.  The corporation is subject to tax in New York for the 2017 tax year.

Example B:

An alien corporation has a net loss that is effectively connected with its U.S. trade or business for the 2017 tax year.  Such corporation conducts its business in a state other than New York.  However, such corporation owns an apartment in New York City.  The corporation is subject to tax in New York for the 2017 tax year.

Example C:

An alien corporation has a net loss that is effectively connected with its U.S. trade or business for the 2017 tax year.  Such corporation conducts its business in a state other than New York and is not engaged in any of the activities listed in Tax Law section 209(1)(a).  The corporation is not subject to tax in New York for the 2017 tax year.

Example D:

An alien corporation has no income, gain, or loss that is effectively connected with its U.S. trade or business for the 2017 tax year and is not treated as a “domestic corporation” for such tax year.  Although the corporation owns an apartment in New York City, the corporation is not subject to tax in New York for the 2017 tax year.

Q. What are the filing requirements of a foreign corporation with $1 million or more in receipts where such corporation has receipts from activities described in Public Law 86-272?  New posting
A.  A foreign corporation with $1 million or more in receipts from activities in New York State related to the sale of tangible personal property is not required to file an Article 9-A tax return if all of its activities in the state are activities described in Public Law 86-272 (and in 20 NYCRR 1-3.4[b][9]). However, a foreign corporation exempt from tax because of Public Law 86-272 may choose to file a Form CT-3.  Such return, if filed, must have the box on line C of page 1 marked, be completed in its entirety, and have $0 entered on Part 2, line 4. 

A foreign corporation with $1 million or more in receipts from activities in New York State is subject to tax and required to file an Article 9-A tax return if any of its receipts are derived from activities in the state other than those described in Public Law 86-272.  Such taxable activities include, for example, the sale of digital products.

Partners and Partnerships

Q. Does corporate tax reform change the method for determining partnership income of a corporate partner?
A. No. The current aggregate theory approach where partnership items of receipts, income, gain, loss, and deduction flow through a partnership to a corporate partner as well as gains or losses from the sale of a partnership interest itself is continued.
 
Q. Does corporate tax reform change the method for determining partnership income of an individual partner?
A. No.
 
Q. How does a partnership with Article 9-A corporate partners apportion its receipts to New York?
A. Partnerships apportion receipts for Article 9-A corporate partners using the rules in Article 9-A of the Tax Law (which generally use customer-based sourcing), and the applicable regulations. For individual partners subject to Article 22 of the Tax Law, the receipts are apportioned using the rules in Article 22.
Q. Can a partnership with Article 9-A corporate partners and Article 22 partners file Form IT-204 and Form IT-204-IP, New York Partner’s Schedule K-1, without filing Form IT-204.1 or Form IT-204-CP?
A. Partnerships must file complete returns. Partnerships with Article 9-A corporate partners must file Forms IT-204 and IT-204.1, and must attach a copy of Form IT-204-CP for each corporate partner subject to tax under Article 9-A.
Q. For tax years beginning on or after 1/1/2015, should amounts less than zero be reported on Form IT-204.1, in Items related to investment and other exempt income under Article 9-A, on lines 19 and 21, and Form IT-204-CP, in Partner’s share of items related to investment and other exempt income under Article 9-A, on lines 19 and 21?
A. Yes, amounts less than zero are reported on these lines if the result of summing the applicable amounts for line 19 or line 21 is a net loss, because these amounts must be netted with like amounts, to an amount not less than zero, at either the corporate partner level, or, for corporate partners included in a combined report, the combined group level.  If the amount for either line 19 or line 21 is a net loss, enter the negative amount using a minus (-) sign. Forms IT-204.1 and IT-204-CP that were filed previously, for tax years beginning on or after 1/1/2015, must be amended if needed, to reflect this rule. You must provide to all corporate partners any such amended Forms IT-204-CP. You must also complete and provide corrected Forms IT-204-CP to all partners that are partnerships or LLCs. You must also provide to all such partners a statement listing, for each of these lines, the amounts by asset/investment.  On such statement, for line 19 amounts, you must list income amounts separately from net gain/(loss) amounts. Note: For line 19 amounts, when netting at the corporate partner or combined group level on Form CT-3.1, losses can only be netted against gains; losses cannot be netted against any other income amounts, such as interest income.

Prior Net Operating Loss (PNOL) Conversion Subtraction

Q. As of what date does a corporation need to meet the small business requirements for purposes of calculating the PNOL conversion subtraction, and what definition should the corporation use to determine if it was in fact a small business on that date?
A. The date for meeting the requirements of the small business definition is the last day of the PNOL base year.  A corporation should use the small business definition of Tax Law section 210.1(f), as that section was in effect on December 31, 2014.
 
The base year is the corporation’s last taxable year that began on or after January 1, 2014, and before January 1, 2015.  The corporation does not need to meet the small business requirements in any other taxable year, nor would meeting such requirements in any other taxable year satisfy the small business test for purposes of calculating the PNOL conversion subtraction.
 
A corporation is a small business for purposes of calculating the PNOL conversion subtraction if it met all of the following requirements on the last day of the base year:
  • the corporation’s entire net income for the base year (before allocation) was not more than $390,000 (which amount will be annualized, for short taxable periods);
  • the total amount of money and other property that the corporation received for stock, as a contribution to capital and as paid-in surplus, was not more than $1 million as of the last day of the base year; and
  • the corporation was not part of an affiliated group, as defined in Internal Revenue Code section 1504, unless the group itself would have met the first two requirements if it had filed a combined return.

If the corporation met the small business definition as of the last day of the base year, then it will not be subject to the statutory limitation on the usage of the PNOL conversion subtraction (i.e., subtracting only 1/10th of the pool in a taxable year). The corporation will also not be subject to the 50/50 election.  As a result, 100% of the corporation’s PNOL conversion subtraction pool will be available to the corporation for inclusion when calculating its PNOL conversion subtraction for the taxable year.

Q. My corporation has a net operating loss carryforward from a tax year prior to January 1, 2015. Where is this loss carryforward reported on the corporation’s 2015 tax return?
A. Unused net operating losses incurred for tax years beginning prior to January 1, 2015, must be converted into a prior net operating loss conversion (PNOLC) subtraction pool. The PNOLC pool and the amount to deduct annually are computed on Form CT-3.3, Prior Net Operating Loss Conversion (PNOLC) Subtraction, and reported on Part 3, line 16 on the 2015 Form CT-3 or CT-3-A. Unused net operating losses from tax years beginning prior to January 1, 2015, are not reported on Part 3, line 18, NOL deduction, of the 2015 Form CT-3 or CT-3-A.

Taxpayers that have already filed their 2015 Form CT-3 or CT-3-A and have incorrectly reported the deduction for their prior year net operating losses must file an amended 2015 tax return and include Form CT-3.3 to avoid a denial of the incorrectly reported deduction and the possible issuance of a notice of deficiency.

Repeal of Article 32

Q. When does a fiscal-year Article 32 filer become subject to tax under Article 9-A?
A. Article 32 is repealed for tax years beginning on or after January 1, 2015. Therefore, an Article 32 taxpayer is subject to tax under Article 9-A starting with its first fiscal tax year that begins on or after January 1, 2015.

Example:

An Article 32 taxpayer with a fiscal tax year beginning on October 1, 2014 will be subject to tax under Article 32 until September 30, 2015. The taxpayer will then be subject to tax under Article 9-A for its fiscal tax year that begins on October 1, 2015.

Reports

Q. My foreign corporation previously filed form CT-245, Maintenance Fee and Activities Return For a Foreign Corporation Disclaiming Tax Liability. Now that the fee has been repealed for tax years beginning on or after January 1, 2015, do I need to file any corporate tax return, or any other form, to report the corporation's activities?
A. Generally, your foreign corporation does not need to file a corporate tax return. However, corporate tax reform also created an economic nexus standard for foreign corporations that derive receipts of $1 million or more from activity in New York for a tax year. This new standard may now subject your foreign corporation or combined group to tax, in which case you would be required to file the appropriate corporate franchise tax return (CT-3, CT-3-S, or CT-3-A if a combined filer). You may also need to file a metropolitan transportation business tax surcharge return (CT-3M) if you have $1 million or more in receipts derived from activity in any of the 12 counties in the Metropolitan Commuter Transportation District for a tax year.
Q. What are the filing requirements of a corporation that would be subject to tax due to the economic  nexus receipts threshold, but is exempt due to Public Law 86-272?
A. A corporation with $1 million or more in receipts from activity in New York that meets the economic  nexus receipts threshold, but is protected by Public Law 86-272, is not required to file an Article 9-A tax return. However, these taxpayers may choose to file a return. Corporate tax returns will include a statement for corporations that choose to file to identify themselves as exempt from tax.
Q. What are the filing requirements for a foreign federal S corporation and its shareholders where an S corporation has economic nexus but is exempt from tax by virtue of Public Law 86-272?
A. Shareholders of a federal S corporation may make the election to treat the corporation as a New York S corporation only if the corporation is an eligible S corporation. An eligible S corporation is a federal S corporation that is subject to tax under Article 9-A of the Tax Law. A federal S corporation that is exempt from tax by virtue of Public Law 86-272 is ineligible to make the New York S election since it is not subject to tax under Article 9-A.
 
A federal S corporation that is ineligible to make the New York S election is not required to file an S corporation tax return. Further, since the corporation is exempt under Article 9-A due to Public Law 86-272, it is not required to file a tax return as a C corporation in New York.
 
Nonresident shareholders of an ineligible S corporation are not subject to New York personal income tax on their pro-rata share of income, gain, loss, and deduction entering into federal adjusted gross income, unless the stock of the corporation is employed in another trade or business carried on by the shareholder in New York. Resident shareholders of an ineligible S corporation must include in New York adjusted gross income the same S corporation pass-through items of income, gain, loss and deduction that are included in federal adjusted gross income.
 
For additional information, please refer to the following advisory opinion:   http://www.tax.ny.gov/pdf/advisory_opinions/multitax/a08_7c_4i.pdf.

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