November 1998 Issue

State and Local Taxation


By Adam Lambert, CPA, Arthur Andersen LLP

The New York State Senate and Assembly have both passed bills (S 5548-B and A 11072-B) which will consolidate employer withholding tax (New York State and City), unemployment insurance and wage reporting, filing, and payment responsibilities. The legislation will take effect on January 1, 1999.

For years, employers had to provide withholding tax and wage reporting on one form (WT-4-A and B until 1998, NYS-4 for 1998), while the state unemployment taxes and information was required to be filed on another (IA-5). The new law will allow employers to file the required information quarterly with the Department of Taxation and Finance (DTF) on a single return and make the required payments in a single remittance. Based on the legislation, the funds would be allocated between unemployment tax and withholding tax after the returns are filed with the DTF.

On the surface, this would appear to be a welcome change from the current system for a few reasons. First and foremost, it would cut down on the employers' compliance burden. Additionally, employers have been required to provide Department of Labor (DoL) auditors with wage reporting information previously provided to the DTF. This should eliminate much of the time wasted by employers hunting down records for audit purposes. Lastly, it would consolidate the recordkeeping and cut down on the paperwork to be filed. *


By Emanuel Eichler, CPA, Cornick, Garber & Sandler, LLP

The 1998 New York State budget contains many corporation franchise tax changes. The tax bill includes changes to the corporation tax rates, new corporation tax credits, reductions in the fixed dollar minimum tax, and a provision to defer the gain from the sale of certain emerging technology investments. The changes are outlined below.

The tax rates imposed on the entire net income base are to be decreased over a three-year period. The current 9.0% tax rate will be reduced to 8.5% for tax years beginning after June 30, 1999. The rate will be further reduced to 8.0% for tax years beginning after June 30, 2000. Finally, for tax years beginning after June 30, 2001, the rate will be reduced to 7.5%.

The rates for small business taxpayers, corporations whose entire net income bases do not exceed $290,000, are also reduced. For tax years beginning after June 30, 1999, the rate on entire net income of up to $200,000 is reduced from 8.0% to 7.5%. If the entire net income exceeds $200,000, but is less than $290,000, the tax rates are reduced as shown in the Table. Finally, for tax years beginning on or after July 1, 2001, the tax rate will be 7.5% of the entire net income base.

The minimum tax rate is to be reduced over a two-year period. For tax years beginning before July 1, 1998, the rate was 3.5% of minimum base taxable income. Beginning July 1, 1998, the rate is 3.25% of the minimum taxable income base, and it drops to 3.0% for tax years beginning on or after July 1, 1999.

The $325 fixed dollar minimum tax, which is based on a corporation's gross payroll, has also been revised with two new classifications added. Under the law in effect prior to July 1, 1998, the minimum tax was $325 for all corporations with an annual gross payroll of $1 million or less. For tax years beginning on or after July 1, 1998, but before July 1, 1999, a new classification has been added for corporations with gross payrolls of $250,000 or less. The minimum tax for corporations in that classification is reduced to $100. For tax years beginning on or after July 1, 1999, a third classification will be added for corporations with gross payrolls of more than $250,000 but not more than $500,000. Corporations falling into that classification will pay a minimum tax of $225.

The minimum S corporation tax has also been effectively reduced from $325 to $100 for tax years beginning on or after July 1, 1998. In addition, the personal income tax rate used in the computation of the S corporation tax is reduced from 7.875% to 6.85% over a three-year period. For tax years beginning on or after July 1, 1999, the rate will be 7.525%. It drops to 7.175% for years beginning after June 30, 2000, and to 6.85% for years beginning after June 30, 2001.

Although other corporation tax rates have been decreased, the Metropolitan Commuter Transportation District surcharges continue at 17%. Furthermore, for tax years beginning on or after July 1, 1998, the surcharge is calculated as if the regular corporation franchise tax were calculated under the method in effect for tax years beginning between July 1, 1997, and June 30, 1998. Thus, the regular corporation tax on entire net income or the capital base would have to be recalculated in order to properly compute the surcharge.

As provided by the New York State Emerging Industry Jobs Act, two new corporation tax credits will be available for years beginning after 1999 for qualified emerging technology companies. A qualified emerging technology company is one that is located in New York State, is involved in research and development or the production of certain high technology products or services, and has annual sales of $10 million or less. A qualified emerging technology company employment credit will be available when an emerging technology company employs 101% or more of the average number of employees employed in its base period. The credit, which may be claimed for three years, equals $1,000 for each employee in excess of the number employed in the base period. Although the credit is limited since it cannot reduce the tax liability below the greater of the fixed dollar minimum tax or the minimum taxable income amount, any excess may be carried forward.

The second credit is the qualified emerging technology company capital credit for investments in an emerging technology company. A qualified investment is the contribution of property to a business entity in exchange for stock or another type of ownership interest. The credit is either 10% of the investment if it is held for at least four years or 20% of the investment if it is held for nine years or more. However, the credit may not reduce the tax liability below the greater of the fixed dollar minimum tax or the minimum taxable income amount, nor may it reduce it by more than 50% of the tax otherwise due. While any excess credit may be carried forward, the total credit that can be claimed by a corporation is limited to either $150,000 or $300,000, depending on the length of time the investment is held.

For both the employment credit and the capital credit for qualifying new business, the excess credit is refundable.

The New York investment tax credit, which is currently available only to manufacturers, processors, assemblers, and the like is extended to the financial services and banking industries for property placed in service between October 1, 1998, and September 30, 2003. The credit is generally five percent of the cost of depreciable tangible property with a useful life of four or more years that is located in New York State and principally used in the ordinary course of business by a broker of stocks, bonds, or other securities, or in the provision of investment or lending advisory services in connection with the purchase of securities. Although the credit cannot reduce the tax below the fixed dollar minimum tax, any excess may be carried forward for 15 years. A qualifying new business may elect to receive a refund on its unused investment tax credit instead of carrying it forward.

In another move to spur investment in New York's technology sector, gains realized from the sale of any emerging technology investment will only be recognized to the extent that the amount realized exceeds the cost of any other qualified emerging technology investment purchased by the corporation within 365 days of the date of sale. This provision applies to technology investments acquired on or after March 12, 1998, and held for more than 36 months. The amount deferred is to be added to Federal taxable income when the second investment is sold. *


State and Local Editor:
Barry H. Horowitz, CPA
Eisner & Lubin LLP

Interstate Editor:
Nicholas Nessi, CPA
BDO Seidman LLP

Contributing Editors:
Henry Goldwasser, CPA
M.R. Weiser & Co LLP

Leonard DiMeglio, CPA
PricewaterhouseCoopers LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher &
Hochman, LLP

John J. Fielding, CPA
PricewaterhouseCoopers LLP

Warren Weinstock, CPA
Paneth, Haber & Zimmerman LLP

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