Reminder of New York State Tax Changes
An April 2014 BKD Alert covered income tax changes in New York state that will have a major impact on out-of-state businesses in 2015. Given these changes, a number of out-of-state businesses could find themselves subject to New York state tax for the first time in the 2015 tax year. Unfortunately, New York will have no safe harbor relief for missed or late estimate or extension payments made by a new taxpayer. As such, it’s vitally important to consider how businesses may be affected by the following upcoming tax changes.
The most sweeping reform is the adoption of an economic nexus standard for tax years beginning on or after January 1, 2015. A business now will be considered to have nexus if it has New York receipts of $1 million or more during the taxable year. A combined group will be considered to have nexus if it has cumulative New York receipts of $1 million or more, only considering members with at least $10,000 in New York receipts. Businesses should proactively evaluate their nexus to make timely estimate payments.
In addition, New York has adopted market-based sourcing for service revenues. Traditionally, revenues have been sourced to New York based on the value of the service actually performed in New York. With the adoption of market-based sourcing, revenues generally will be derived from New York sources if the customer receives the benefit of the service in New York. These new rules likely will increase the revenue being sourced to New York by out-of-state businesses.
Another notable change for 2015 is the removal of the “substantial intercorporate transactions” test previously prescribed for determining a combined filing group. Taxpayers now must file a combined report including all eligible unitary corporations. In addition, taxpayers can make a “common ownership election” to include commonly owned nonunitary corporations in their combined group. Taxpayers should consider whether this binding election might be a beneficial safe harbor.
Net Operating Losses
Finally, New York will require net operating losses (NOL) to be computed on a post-apportionment basis as opposed to pre-apportionment. New York has mandated conversion of existing preapportionment NOLs into postapportionment NOLs. The state will offer taxpayers two options for carrying these NOLs forward: subtracting half of these NOLs in 2015 and 2016 or subtracting one-tenth of these NOLs over a 20-year carryforward period. Part of the NOL conversion will be achieved by multiplying the preapportionment NOLs by the tax rate and apportionment percentage applicable to the 2014 tax year. The conversion could have significant implications for taxpayers qualifying for preferential tax rates, and taxpayers should consider the potential loss of NOLs when determining their 2014 tax rate and carryforward options.
If you have questions about how the New York state tax law changes affect your organization, contact your BKD advisor.