NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A4168
SPONSOR: Stirpe TITLE OF BILL:
An act to amend the tax law, in relation to pass-through manufacturers
zero percent tax rate
PURPOSE OR GENERAL IDEA OF BILL:
This legislation extends the zero percent franchise tax'rate to all
manufactures in New York. Currently, this tax rate is only extended to
the largest C Corps.
SUMMARY OF SPECIFIC PROVISIONS:
Section 1: Amends the tax law requiring an addition to NY income, for
net loss of a qualified NY pass-through manufacturer, where the loss is
determined in the same manner as net income from a pass-through manufac-
turer, as provided in Section two.
Section 2: Amends the tax law to disallow qualified pass-through
manufacturers from taking the small business tax exemption, by excluding
qualified pass-through manufacturers from the definition of a small
business for this purpose.
Allows a deduction from NY income, for net income of a NY qualified
pass-through manufacturer, where net income is adjusted for NY depre-
cation (vs. Federal bonus deprecation), as well as ensuring that the
reasonable compensation of the owners is not included in the deduction
(is fully taxable).
Defines qualified pass-through manufacturers to be sole proprietorships,
partnerships, LLCs electing to be treated as a sole proprietorship or
partnership, or an S corporation.
Defines qualified pass-through manufacturers by reference to the defi-
nition of qualified NY manufacturer in the franchise tax law.
Also excludes a START-UP NY participant business from the definition of
a pass-through manufacturer.
Section 3: Amends the tax law to disallow pass-through manufacturers
from taking the investment tax credit, by disqualifying property placed
in service during a tax year when they are a pass-through manufacturer.
Section 4: Amends the tax law to disallow C-corporations from taking the
investment tax credit, by disqualifying property placed in service
during a tax year when they are a qualified NY manufacturer.
Section 5: Provides for a three-year phase-in of addition and
subtraction provided in Section one and two, as well as the disquali-
fication of investment tax credit property. For tax years beginning on
or after January 1, 2025: 40%; for tax years beginning on or after Janu-
ary 1, 2026: 80%; and for tax years beginning on or before January 1,
2027: 100%
Section 6: Sets the effective date.
JUSTIFICATION:
In 2014, a zero percent corporate franchise tax rate was enacted for
manufacturers organized as C corps. This accounted for only 25% of
manufacturers in New York State. While this was a significant help to
those manufacturers, it left 75% of manufactures still paying the higher
rate, putting them at a competitive disadvantage with manufacturers
located in states with no income tax.
This legislation would extend the zero percent Corporate Franchise Tax
rate to all manufacturers in New York State regardless of how they are
organized. The proposed changes lower the income tax rate to zero for NY
pass-through manufacturers by: creating a "NY modification" that
subtracts the income, or adds back a loss (if any); disallowing any
Investment Tax Credits for affected entities/taxpayers; disallowing the
existing 5% subtraction modification for small businesses (for affected
entities/taxpayers); and disallowing a resident credit for taxes payable
to another state (not applicable if NY tax is zero).
According to a study conducted by The Beacon Hill Institute in November
2017, "the elimination of the PIT for pass-through manufacturers would
increase private sector jobs by 3,455 the first full-year and by 4,850
in 2022. The increase in economic activity sparked by extending the
zero-percent tax rate to income from pass-thrqugh manufacturers would
mitigate the loss of revenue to New York State and boost local tax
collections.
Enacting this proposal could catapult New York's ranking as a manufac-
turing friendly state from 49th to one of the top-ranked states, estab-
lishing New York as a safe haven for manufacturers. This would allow
existing manufacturers to continue to invest in their operations and
workforce in New York as well as attract manufacturers from across the
country and worldwide.
PRIOR LEGISLATIVE HISTORY:
2021-2022: A.3734/S.27: Referred to Ways and Means
FISCAL IMPLICATIONS:
Approximately $188 million.
EFFECTIVE DATE:
This act shall take effect immediately and shall apply to tax years
beginning on or after January 1, 2025.
STATE OF NEW YORK
________________________________________________________________________
4168
2023-2024 Regular Sessions
IN ASSEMBLY
February 10, 2023
___________
Introduced by M. of A. STIRPE, WALLACE, WOERNER, CONRAD, LUPARDO,
PALMESANO -- read once and referred to the Committee on Ways and Means
AN ACT to amend the tax law, in relation to pass-through manufacturers
zero percent tax rate
The People of the State of New York, represented in Senate and Assem-bly, do enact as follows:
1 Section 1. Subsection (b) of section 612 of the tax law is amended by
2 adding a new paragraph 44 to read as follows:
3 (44) Any income, gain, loss and deduction, to the extent it is
4 included in federal adjusted gross income and is, when combined and
5 combined with additions for federal deprecation required by paragraph
6 eight of this subsection and subtractions for New York allowed by
7 subsection (k) of this section, less than zero, of an individual or
8 trust from a qualified pass-through manufacturer, as defined in para-
9 graph forty-seven of subsection (c) of this section.
10 § 2. Paragraph 39 of subsection (c) of section 612 of the tax law, as
11 amended by section 1 of part C of chapter 59 of the laws of 2022, is
12 amended and a new paragraph 47 is added to read as follows:
13 (39) (A) In the case of a taxpayer who is a small business or a
14 taxpayer who is a member, partner, or shareholder of a limited liability
15 company, partnership, or New York S corporation, respectively, that is a
16 small business, who or which has business income and/or farm income as
17 defined in the laws of the United States, an amount equal to fifteen
18 percent of the net items of income, gain, loss and deduction attribut-
19 able to such business or farm entering into federal adjusted gross
20 income, but not less than zero.
21 (B) (i) For the purposes of this paragraph, the term small business
22 shall mean: (I) a sole proprietor who employs one or more persons during
23 the taxable year and who has net business income or net farm income of
24 greater than zero but less than two hundred fifty thousand dollars;
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[] is old law to be omitted.
LBD02164-01-3
A. 4168 2
1 (II) a limited liability company, partnership, or New York S corpo-
2 ration that during the taxable year employs one or more persons and has
3 net farm income attributable to a farm business that is greater than
4 zero but less than two hundred fifty thousand dollars;[or]
5 (III) a limited liability company, partnership, or New York S corpo-
6 ration that during the taxable year employs one or more persons and has
7 New York gross business income attributable to a non-farm business that
8 is greater than zero but less than one million five hundred thousand
9 dollars[.]; or
10 (IV) For the purposes of this paragraph, the term small business shall
11 exclude any business that is a qualified pass-through manufacturer, as
12 defined in paragraph forty-seven of this subsection for the current tax
13 year.
14 (ii) For purposes of this paragraph, the term New York gross business
15 income shall mean: (I) in the case of a limited liability company or a
16 partnership, New York source gross income as defined in subparagraph (B)
17 of paragraph three of subsection (c) of section six hundred fifty-eight
18 of this article; and (II) in the case of a New York S corporation, New
19 York receipts included in the numerator of the apportionment factor
20 determined under section two hundred ten-A of this chapter for the taxa-
21 ble year.
22 (C) To qualify for this modification in relation to a non-farm small
23 business that is a limited liability company, partnership, or New York S
24 corporation, the taxpayer's income attributable to the net business
25 income from its ownership interests in non-farm limited liability compa-
26 nies, partnerships, or New York S corporations must be less than two
27 hundred fifty thousand dollars.
28 (47) (A) Any income, gain, loss and deduction, to the extent included
29 in federal adjusted gross income and is, when combined and combined with
30 additions for federal depreciation required by paragraph eight of this
31 subsection and subtractions for New York allowed by subsection (k) of
32 this section, greater than zero, of an individual or trust from a quali-
33 fied pass-through manufacturer. Income from a qualified pass-through
34 manufacturer shall include wages of an individual controlling ten
35 percent or more of the qualified business or entity. Income or loss from
36 a qualified pass-through manufacturer shall not include an amount
37 representing reasonable compensation for personal services, as defined
38 in the internal revenue code section one hundred sixty-two regulations,
39 for an individual controlling ten percent or more of the qualified busi-
40 ness or entity.
41 (B) The qualified pass-through manufacturer may be organized as a sole
42 proprietorship, a partnership, a limited liability company electing to
43 be treated as a partnership or sole proprietorship, or an S corporation.
44 (C) For the purposes of this subsection, the term qualified pass-
45 through manufacturer shall mean a business that is a qualified New York
46 manufacturer, as defined by subparagraph (vi) of paragraph (a) of subdi-
47 vision one of section two hundred ten of this chapter, except that the
48 term "gross receipts" shall be replaced by "business receipts" in deter-
49 mining whether the business is "principally engaged" in manufacturing. A
50 qualified pass-through manufacturer shall not include a business that is
51 currently participating in the START-UP NY program.
52 § 3. Paragraph 2 of subsection (a) of section 606 of the tax law is
53 amended by adding a new subparagraph (B-1) to read as follows:
54 (B-1) Property placed in service during the tax year that is otherwise
55 eligible for the investment tax credit described in subparagraph (A) of
56 this paragraph, will not be eligible for the investment tax credit if
A. 4168 3
1 the use of the property is by a qualified pass-through manufacturer, as
2 defined in paragraph forty-seven of subsection (c) of section six
3 hundred twelve of this article for the current tax year.
4 § 4. Subdivision 1 of section 210-B of the tax law is amended by
5 adding a new paragraph (g) to read as follows:
6 (g) Property placed in service during the tax year that is otherwise
7 eligible for the investment tax credit described in this subdivision,
8 will not be eligible for the investment tax credit if the use of the
9 property is by a qualified New York manufacturer, as defined in subpara-
10 graph (vi) of paragraph (a) of subsection one of section two hundred ten
11 of this article for the current tax year.
12 § 5. For purposes of determining the modifications of paragraphs 39
13 and 47 of subsection (c) of section 612 of the tax law and the invest-
14 ment tax credit disallowance of subparagraph (B-1) of paragraph 2 of
15 subsection (a) of section 606 of the tax law, the amounts shall be
16 multiplied by the following percentages: (a) for tax years beginning on
17 or after January 1, 2025: forty percent; (b) for tax years beginning on
18 or after January 1, 2026: eighty percent; and (c) for tax years begin-
19 ning on or after January 1, 2027: one hundred percent.
20 § 6. This act shall take effect immediately and shall apply to tax
21 years beginning on or after January 1, 2025.
