TiNY Particular Version: Begin of the New 12 months (January 5, 2021) | Hodgson Russ LLP

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  TiNY Special Edition: Start of the New Year (January 5, 2021) |  Hodgson Russ LLP

I noticed that the New York Department of Taxation and Finance (the “Department of Taxes”) posted the instructions on the 2020 Form IT-558 this week. The form is intended to explain the changes to the addition / subtraction of personal income tax caused by the CARES Act and the partial decoupling of New York. In this release, the Tax Department is correcting certain items set out in a draft Form IT-558 that was released approximately a month ago (the “Draft”).

Such a form is imperative (in fact, something similar may be required for tax years prior to 2020 that were affected by the CARES Act). And I recommend that the tax department distribute the draft and then correct it before the final version is released. This is how the government should work. In particular, I was pleased to read that the tax authorities had abandoned the additional amendment to the draft income from PPP loans granted.

Some background is necessary to understand my point of view. Let’s start with the CARES Act:

The CARES law is not a tax burden. While it includes changes to the Federal Internal Revenue Code (IRC), it includes many other regulations, including tax-exempt regulations and other regulations amending the Small Business Act and other tax-free laws. A non-code tax provision is included in CARES Act Section 1105 (i). Regarding PPP loan issuance, it states: “A canceled debt under this section is excluded from gross income for the purposes of the Internal Revenue Code 1986.” This provision does not change the IRC, it merely states as the IRC does under certain Circumstances is to be interpreted. Surely a change to IRC § 61 could have achieved the same result. However, Congress decided to go in a different direction. The lack of a change in the IRC is critical to our analysis.

Now let’s look at each other Calculating New York’s Adjusted Gross Income Under Income Tax:

New York’s starting point for calculating taxable income is Federal Adjusted Gross Income (FAGI). New York applies addition and subtraction changes to FAGI to determine New York Adjusted Gross Income (NYAGI). If an item of income, profit, loss or deduction is included in FAGI’s calculation and no change has been made to remove it, it will be included in NYAGI’s calculation. If such an element is not in FAGI and there is no change to add, it is also not in NYAGI. Easy right? If Congress adopts a change on IRC to remove an article from FAGI and New York law does not respond, the article will also be removed from NYAGI.

After all, How did New York break out of the CARES Act?

In March, given the increased need for COVID response spending and decreased revenue from a COVID-impoverished economy, New York Legislature stated that the additional State Fisc impact resulting from certain IRC amendments to the CARES Act to reduce the FAGI revealed were undesirable. Accordingly, the legislature has passed a provision in the 2020-2021 budget to “decouple” certain provisions of the CARES Act. However, at least in relation to personal income taxpayers, only the provisions of the CARES law amending the IRC have been negated by the legislature. Here is the specific decoupling language of 2020 Laws of New York Ch. 58, part WWW, § 2: “[Tax Law § 607(a) is amended to read as follows:] General. Any term used in this article has the same meaning as it does in a similar context in United States laws relating to federal income taxes, unless a different meaning is clearly required, but such meaning is subject to exceptions or amendments prescribed in this article or by Law. Any reference in this article to United States law means the provisions of the Internal Tax Code nineteen eighty-six (unless a reference to the Internal Tax Code of nineteen fifty-four is clearly intended) and its amendments and other provisions relating to United States law Federal income taxes as these can or will come into effect at any time or from time to time for the tax year. Provided, however, that for tax years beginning before January first two thousand twenty-two, changes to the Internal Tax Code of nineteen eighty-six after March first twenty-two do not apply to this article. “ (Change is the highlighted language)

According to the budget passed by lawmakers (and signed by the governor in early April), the FAGI – the starting point for calculating the NYAGI – is to be calculated by 2021 as if none of the changes to the IRC adopted after March 1, 2020 – including those in the CARES law – occurred. These include amendments to IRC Section 461 (l) relating to excessive business loss and IRC Section 163 (j) relating to restrictions on business interest deduction. Since the exclusion of the CARES Act from FAGI for PPP loans granted does not constitute a change to the IRC, the legislature’s decoupling act should not result in the composition of the FAGI in New York being increased by the federally excluded PPP lending income. Therefore, the exclusion should also be reflected in the calculation of NYAGI.

I was surprised to hear that the draft Form IT-558 Instructions required that when calculating NYAGI, personal income taxpayers had to modify the FAGI by adding any CARES law-excluded debt relief proceeds from an issued PPP loan . Here is the draft statement:

“A-007 Forgiveness of the Paycheck Protection Program
If you had a debt that was made on a loan that falls under the Federal Paycheck Protection Act, Act 116-136, Section 1106, and you received an amount under Federal Income 116-136, Section 1106 (i) dated Excluded federal gross income, then enter such an amount. ”

Insofar as the exclusion of FAGI for issued PPP loans is not a “change in the internal tax code … after the first of March 20,000”, I assume that the tax authorities have withdrawn the draft in order to reconsider, among other things, the change in the issued PPP loan Income. And so I was pleased that the current version, which was published on the tax authority’s website, now reads:

“A-007 Intentionally omitted.”