The Return of the New York Capital Tax – Beware Insurers!
On April 19, 2021, New York passed its fiscal year (FY) 2021-2022 budget bill (S.B. 2509, Laws 2021), covering $212 billion in estimated state spending for the year. The legislature pushed for, and mostly obtained, a number of significant tax increases largely focused on corporations and wealthy individuals. These provisions are estimated to raise $2.5 billion in additional tax revenue in FY 2021-2022 and $4.3 billion in additional tax revenue in FY 2022-2023, while providing targeted relief to low- and middle-income individual taxpayers and businesses negatively affected by COVID-19.
One of the many tax provisions within the budget bill is the “temporary” reinstatement of the capital base tax. The capital base tax was statutorily set to phase out completely as of January 1, 2021, via a 0.0 percent tax rate. As such, the capital base tax is fully restored, effective for taxable years beginning on or after January 1, 2021, and expiring on January 1, 2024. The tax rate for all three additional years is 0.1875 percent, which is an increase over the pre-phaseout rate of 0.15 percent.
The corporation franchise tax under Article 9-A of the New York Tax Law is imposed on the highest of a base tax measured by income or alternate tax bases, being the capital base tax and a fixed-fee minimum tax based on New York gross receipts. The current version of the capital base tax was established in the sweeping New York tax reform included in the FY 2014-2015 New York State Budget (S.B. 6359, Laws 2014) and is effective for tax years beginning on or after January 1, 2015.
The general basics of the tax are as follows:
NY Tax Law Section 210(1)(b):
- The capital base tax rate is 0.15 percent for each dollar of the taxpayer’s total business capital.
- The tax rate is ratably phased down over tax years 2016 to 2020, with a 0.0 percent rate set as of January 1, 2021 (effectively repealing the tax).
- The capital base tax rate is 0.1875 percent for tax years 2021 to 2023.
- The maximum liability under the capital base tax is $5 million.
NY Tax Law §208(7):
- The term “business capital” means all assets, other than investment capital and stock issued by the taxpayer, less liabilities not deducted from investment capital.
- Business capital shall include only those assets the income, loss, or expense of which are properly reflected (or would have been properly reflected if not fully depreciated or expensed or depreciated or expensed to a nominal amount) in the computation of entire net income for the taxable year.
NY Tax Law §208(5):
- The term “investment capital” means investments in stocks that (i) satisfy the definition of a capital asset under Internal Revenue Code (IRC) §1221 at all times the taxpayer owned such stock during the taxable year, (ii) are held by the taxpayer for investment for more than one year, (iii) the dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the IRC, (iv) are generally not held for sale to customers, and (v) are clearly identified in the taxpayer’s records as stock held for investment.
- Liabilities directly or indirectly attributable to investment capital are subtracted from the investment capital, but not below zero.
- Investment capital excludes (i) stock in a corporation that is conducting a unitary business with the taxpayer, (ii) stock in a corporation that is included in a combined report with the taxpayer, and (iii) stock issued by the taxpayer. Direct or indirect ownership of less than 20 percent of the voting power of the stock of a corporation is presumed to be a non-unitary relationship.
NY Tax Law §208(9):
- The term “entire net income” means total net income from all sources, which shall be presumably the same as the entire taxable income, which the taxpayer is required to report to the U.S. Department of the Treasury.
NY Tax Law §210-C:
- Unitary groups linked by direct or indirect ownership of more than 50 percent of the voting power of the affiliates are required to file combined corporation franchise tax reports.
- Unitary groups specifically exclude entities subject to a different New York franchise tax regime, i.e., transportation companies subject to tax under Article 9 and insurance companies being subject to tax under Article 33.
- In computing the tax bases for a combined report, the combined group shall generally be treated as a single corporation. As such, all intercorporate stockholdings, intercorporate bills, intercorporate notes receivable and payable, intercorporate accounts receivable and payable, and other intercorporate indebtedness shall be eliminated in the computation of the combined capital base tax.
For many insurance groups (and transportation businesses), the return of the New York capital base tax is like the monster in a horror movie that just won’t die. With the implementation of unitary combined filings, the New York Department of Taxation and Finance’s sustained position is that intercompany eliminations are only permitted to the extent the entity or entities are included in the combined filing group. Because insurers are specifically excluded from Article 9-A combined filing groups, a noninsurance parent of an insurance company required to file a separate or combined New York corporation franchise tax report generally will be required to include the investment in the insurance subsidiary in their capital base tax (as they are not a member of the combined filing group). Depending on the investment value and New York apportionment factor, the resulting capital base tax can be significant. This will only be magnified over the next three years due to the increase in the capital base tax rate. An additional concern is that the “temporary” extension of the tax will become permanent.
However, depending on the insurance (or transportation) group’s facts and circumstances, there may be planning opportunities to help reduce the effect of the tax. To learn more about the tax or discuss how this reinstated tax could affect your organization, contact your BKD Trusted Advisor™ or submit the Contact Us form below.