Relates to certain tax credits against NYC personal income tax for S corporations

Statement in support

This bill will enable New York City to continue providing relief to resident shareholders of S-Corporations that pay New York City's general corporation tax.

Small businesses are the core of economic life in New York City. More than three quarters of the firms in the City have less than 10 employ- ees. These firms are found in all sectors of the City's economy-from law and finance to retailing and health care. Most firms of this size are either unincorporated or organized as S-Corporations. To be eligible for S-Corporation status, a corporation must have fewer than 100 stockhold- ers, be owned by individuals rather than other corporations, and all owners must live in the United States.

1 The Federal government has long offered these businesses an important tax break-- it has exempted them from the Federal corporate income tax. Instead, all income and deductions are passed on to the owners, where it is subject to their personal income tax, thus avoiding double taxation on these earnings. Currently most states, including New York, New Jersey and Connecticut, recognize S-Corporations, and partially or fully exempt them from their state corporate income taxes.

It is different in New York City. New York City residents that are stockholders in S-Corporations that do business in the City face double taxation. First, their businesses pay the general corporation tax (GCT) on the net earnings of the firm. These same earnings are passed on to the stockholders and taxed again under the City's personal income tax (PIT)

The Legislature and the New York City Council recognized this problem for unincorporated businesses and, starting in 1997, provided a partial credit against the City's PIT for unincorporated business tax filers.

In 2013, the Legislature, at the request of the City Council, extended similar relief from double taxation to S-Corporations, by enacting the current credit, applying it from January 1, 2014 through June 30, 2015.

This bill would help relieve the double taxation of owners of S-Corpora- tions in New York City.

Resident shareholders of S-Corporations would be able to take a nonre- fundable credit against their New York City personal income tax liabil- ity equal to a portion of their share of the business's corporate tax liability. There are some similarities between this credit and the PIT credit for unincorporated business taxes. One difference, however, is that the S-Corporation credit is not available for shareholders with taxable incomes of over $100,000, which targets the credit to middle income households. There are 142,000 taxpayers that are S-Corporations in New York City, roughly half of all GCT taxpayers.{2} Most S-Corpora- tions are small businesses.

Fiscal impact

This credit would reduce the personal income tax of New York City resi- dents who are shareholders in S-Corporations by $30 million in City fiscal year 2016. Extension of the credit is assumed in the City's fiscal year 2016 Preliminary Budget Plan. There would be no fiscal impact on New York State.

Effective date

This act shall take effect immediately 2 New York City Department of Finance, tax year 2010.

{2} New York City Department of Finance, tax year 2010.