Establishes a credit against the general corporation tax

This subdivision provides that for tax years beginning on or after January 1, 2010, eligible taxpayers who engage in retail activity will be eligible for a non-refundable credit, termed the "Small Retailer S-Corp Credit", against such eligible taxpayer's general corporation tax liability.

The amount of this credit will be computed as follows:

1) If the general corporation tax liability of an eligible taxpayer is $3,400 or less, a tax credit is allowed for the entire amount of the tax.

2) If the tax liability is over $3,400, but less than $5,400, the amount of the credit will be gradually phased out using the following formula: the multiplication of the eligible taxpayer's general corporation tax liability by a fraction, the numerator of which will be $5,400 minus the amount of the liability, and the denominator of which will be $2,000.

3) If the tax is $5,400 or more, no credit is allowed.

Eligible taxpayers are defined as taxpayers that are subject to New York City's general corporation tax and have elected to be classified as an S-corporation pursuant to section 606 of the New York State tax law.

Retail activity is defined as activity that consists predominantly of the sale of" 1) eligible personal property to any person for any purpose unrelated to the trade or business of such person; or 2) food and food products offered to a consumer in an establishment or section of an establishment that are intended for off-premise consumption; or 3) physical care of the personal property of any person unrelated to the trade or business of such person. Retail activity excludes the sale of the above products or services through the mail, telephone, wireless communication, or by the internet.

Under the bill, separate corporations subject to the general corporation tax that have substantially the same shareholders, each such shareholder has substantially the same interest in such corporations, and such

corporations are engaged in substantially the same business or related business, will be treated as one corporation for purposes of the Retailer Credit.

Section 2 of the bill provides that the Commissioner of the Department of Finance shall promulgate any rules necessary to implement the provisions of the bill no later than June 15, 2010.

Section 3 of the bill provides that the act shall take effect immediately.

Statement in support

Small retailers are the lifeblood of our neighborhood shopping streets and the anchors to many of our communities. Their health is important not only to the City's economy, but to the fabric of our neighborhoods that make New York City a unique and diverse city.

In New York, a "S-Corporation" is a corporation with 75 or fewer shareholders, that has elected and qualified for a special tax status with the Internal Revenue Service (IRS).

Generally, the principal advantages of electing S-Corporation status is that it avoids the double taxation that occurs with a regular C-Corporation. In a C-Corporation, the corporation pays corporate income tax on its profits and, if those profits are distributed to shareholders, the shareholders must also pay personal income tax on the distribution of those profits, in effect double taxation. In an S-Corporation, income passes through the corporation to the shareholders, who recognize the income or loss on their personal tax returns, therefore avoiding a perceived double taxation of a C-Corporation. New York City, however, does not recognize S election status for purposes of its general corporation tax. Accordingly, a federal S Corporation that makes the S election for New York State purposes would be taxed as a C-corporation for NYC tax purposes and required to pay NYC's general corporation tax. The firm's income would then be distributed to its owners, if they are New York City residents, would then be taxed again, paying the City personal income tax. Besides most small retailers in NYC are S-Corporations, the City is effectively taxing these neighborhood businesses in the same manner as much larger Fortune 500 companies, which are established as C-corporations. This is bad both for New York City's economy and for its neighborhoods.

Under this bill, small retailers, who are organized as S-Corporations and whose general corporation tax liabilities are less than $3,400 would receive a tax credit equal to their tax liability, effectively zeroing-out the tax. Those whose liabilities are a bit higher, up to $5,400 would receive a tax credit that would partially offset their tax liabilities.

The New York City Council believes taxing small businesses in the same way as Fortune 500 companies is not wise. Last year, the Council,

working with the Mayor and the State Legislature, created a credit, similar to this bill's Small Retailer S-Corp credit, which effectively exempted freelancers and other small businesses from City business taxes. The New York City Council sees the Small Retailer S-Corp credit as the next step in a continuing process of reforming the way small businesses are taxed in the City.

The New York City Council urges timely enactment of this legislation by the State Legislature.

Fiscal implication

By New York City Council Finance Division estimates about 19,000 firms would be eligible for the credit. The average benefit for firms, whose owners are making a living from their business and with a maximum benefit of $3,400. The program would cost the City $6.1 million in Fiscal 2011.

Effective date

Immediately, with provisions.