by John Gauger
Various elections can be made on a New York Corporate tax return that may ease a taxpayer’s liability, save time preparing a return, or ease the burden of documenting a position when records are unavailable or difficult to obtain.
Designated Agent (Parent of Combined Return)
Corporations may save considerable dollars by reviewing who they may want to be a combined parent on the New York Tax Return.
Combined New York tax is calculated on the higher of tax on income, tax on capital, or fixed dollar minimum tax (“FDM”) for the designated agent PLUS the FDM tax for each combined affiliate.
Choosing a member of the combined group that has the highest FDM tax to be the designated agent may result in considerable tax savings in many cases. A comparison of FDM tax would need to be made to the tax on income and tax on capital, rather than being added to it.
Revoke NOL Carryback
New York allows taxpayers to carry back losses for three years (although nothing can be carried back to years prior to 2015). There may be many reasons a company may not want to carry back a loss from a current tax period. They may range from the cost of filing an amended return to minimizing the risk of a return being audited.
Should a company fail to carry back losses when not revoking the NOL carryback, a company can risk an auditor denying an NOL deduction in future periods. The auditor can make an adjustment to deny the carry forward of the loss (because this election was not made) and carry it back to a year that is out of statute, assuming the year the loss is generated is also out of statute.
Partnership Election – Equity Method
When a corporation has a partnership that is not unitary and has an investment of less than 5% in the partnership and meets several other conditions that would otherwise mandate the use of the aggregate method, a company can elect to use the equity method to report the items affecting the partnership. In short, that means reporting the partnership’s income with no New York modifications and reporting that income in the apportionment factor. This can save time and documentation. The corporation would also lose any tax credit flowthroughs that the partnership may have that could be utilized under the aggregate method.
The aggregate method will be required for reporting most partnerships and requires the corporation to report its share of the apportionment factors in the corporate return, make any New York modifications to income, and utilize its share of any tax credits from the partnership.
Combined Return – Ownership
New York requires a combined return if the more than 50% ownership and Unitary Business requirements are met.
If the Unitary Business requirement is not met, the taxpayer can only elect to combine based on the ownership test. This election would require the taxpayer to file the current year’s return in addition to the next six years under this methodology. If the election is revoked after the 7th year, a new election cannot be made in the three years following the revocation.
Please note that NY has a broad definition of companies that meet the ownership requirement. It may include companies outside the consolidated federal group.
A taxpayer may elect to reduce gross investment income and gross exempt other income by 40% in lieu of making a direct and indirect attribution of interest expense for the investment in these companies. This election is not available to the investments in cross-article companies such as insurance companies or telecom companies that are taxed under article 33 or article 9.
The 40% safe harbor election applies to both types of income/capital when the election is made.
When determining if this election should be made, an attribution to each type of income should be performed. The attribution may require an add-back of interest expense attributable even if there is no income in the current year for a specific type of investment. For example, suppose a taxpayer has gross investment income of $1,000,000, and the attribution is $100,000. In that case, the taxpayer may still want to use the 40% safe-harbor ($400,000) if the attribution to exempt unitary capital is more than $300,000 even though there may be no exempt unitary income in the period.
Qualified Financial Instruments Election
When a taxpayer has income from financial instruments that are marked to market under sections 475 or 1256 of the federal code, they may elect to apportion 8% of the receipts to New York rather than using customer-based sourcing rules to allocate the investment. If such an election is made, then all income within a specific investment class, whether or not the individual investment is marked to market, is allocated by 8%, if any investment in that class is marked to market.
If no investment within the investment class is marked to market, then the investment class is allocated by customer-based sourcing rules.
When a taxpayer has a material investment in federal, state, and local debt, an analysis should be performed to determine if any of this income is marked to market. If it is marked to market, further analysis should be made to determine if it would be better to use customer-based sourcing rules rather than the 8% election to allocate all QFI income. All government debt, including the debt of New York, is allocated at zero if the 8% election is not applicable.