On April 3, 2020, New York State enacted the 2021 fiscal year budget (Budget). The Budget contains several tax measures including decoupling from taxpayer relief provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act was signed into law on March 27, 2020 with the primary objective to provide economic relief and greater liquidity to American taxpayers facing hardship because of the COVID-19 crisis. Specifically, the Budget decouples from taxpayer favorable provisions in the CARES Act including the increase to the permitted business interest expense deduction and the beneficial NOL provisions. As a result, New York taxpayers will not receive the benefit of the CARES Act relief provisions for New York tax purposes.
- Business Interest Expense Deduction Limitation: The Tax Cuts and Jobs Act (TCJA) imposed a new limit on the amount of business interest that taxpayers can deduct in a tax year. A taxpayer’s interest deduction was limited to the sum of: (i) a taxpayer’s business interest income; (ii) 30% of a taxpayer’s adjusted taxable income (ATI); and (iii) the taxpayer’s floor plan financing interest. Under the CARES Act, the 30% threshold has been increased to 50% of ATI for the 2019 and 2020 tax years. The objective of this provision is to enable taxpayers to deduct more of their business interest expense for the 2019 and 2020 tax years. Further, pursuant to the CARES Act, taxpayers have the option to elect to use their 2019 ATI to compute their business interest deduction for the 2020 tax year, which will presumably be higher than the 2020 ATI as a result of the COVID-19 pandemic.Since New York State tax law provided for rolling conformity to the Internal Revenue Code (IRC), New York taxpayers would automatically be permitted to take advantage of the increased (30% to 50%) business interest expense deduction. However, the Budget decoupled from the CARES Act provisions by imposing static conformity to the IRC as of March 1, 2020 for the tax years beginning before January 1, 2022. Therefore, New York taxpayers will not receive the benefit of the increased business interest expense deduction, or the election to use the higher ATI from 2019 or 2020 for New York tax purposes.
- NOL Modifications: Pre-TCJA, taxpayers were permitted to carry NOLs back 2 years and forward 20 years. Further, taxpayers were permitted to utilize an NOL carryforward to fully reduce taxable income without any limitation. The TCJA amended IRC § 172 to eliminate carrybacks and limited the use of NOLs (post-December 31, 2017) to 80% of taxable income. The CARES Act provisions permit taxpayers to carry back NOLs from 2018, 2019, and 2020 for five years. Further, the CARES Act lifts the 80% utilization limit for tax years before January 1, 2021.
The CARES Act NOL provisions do not have a significant impact for New York Corporate Franchise Tax purposes because taxpayers have a state-specific NOL carryforward for tax years beginning on or after January 1, 2015. While the ability to carry NOLs from the 2018 and 2019 tax years might have reached back into the 2013 or 2014 tax years, the Budget decoupling from the CARES Act eliminates any chance the NOL provisions would apply to the calculation of New York taxable income.
New York is the first state to address conformity to the tax relief provisions of the CARES Act. It will be interesting to see how other states respond to the CARES Act tax provisions. We are continuing to closely track this issue and will provide an update if there are further developments.