In a year that has been filled with uncertainty, the world of taxes is no exception. On March 27, 2020, the Federal Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, and although the act was enacted at the federal level, it had yet to be seen whether states will follow suit.
New York (NY) has become the first state to decouple its personal income taxes from any amendments made to the Internal Revenue Code (IRC) after March 1, 2020. This includes the changes implemented with the CARES Act, as well as any other federal changes to the IRC that take place after the above date.
NY is a rolling conformity state, which requires a new adjustment on New York State tax returns. This calculation will look at the amount reported as federal adjusted gross income (AGI), and then adjust it by adding certain items back to that original federal AGI and subtracting others. In order to clearly arrive at this recomputed federal AGI, NY has developed Form IT-558: New York State Adjustments due to the Decoupling from the IRC. Much like Form IT-225: New York State Modifications, which provides for additions and subtractions from federal AGI to arrive at New York AGI, IT-558 will do the same, except that it is specific to items covered in the CARES act.
Here’s a summary of those changes:
Coronavirus-related distributions from an eligible retirement plan. For distributions taken from retirement plans, NY is requiring that the entire amount be added back to federal AGI, and then taxpayers will subtract out any taxable amount already included in federal AGI.
Loans from a qualified employer plan. NY is requiring the total amount of the loan taken to be added back as an adjustment, to the extent it is not already included in federal AGI, when such loan added to the outstanding balance of all other loans outstanding exceeds the lesser of:
- $50,000, reduced by the excess (if any) of:
- the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which such loan was made, over
- the outstanding balance of loans from the plan on the date on which such loan was made.
- the greater of:
- one-half of the present value of the non-forfeitable accrued benefit of the employee under the plan, or
Deduction for charitable contribution in accordance with IRC Sec. 62. Created as a new charitable deduction for those taking the standard deduction on their federal return of up to $300. This amount is required to be added back to income for NY purposes.
Exclusion for certain employer payments of student loans. NY requires that any amounts that were paid on behalf of an employer by an employer, of principal or interest for certain student loans, be added back.
Adjustment for net operating losses. Any net operating losses (NOLs) claimed on a taxpayer’s federal return must be added back for NY state purposes. The NOL must then be recalculated by using the rules in place prior to any changes made to the IRC after March 1, 2020. Once recalculated, a subtraction adjustment would be taken for the NY State NOL.
Adjustment for excess business losses. Excess business losses that are deducted on the federal return must be added back. Any excess business losses will then be treated as a NOL carryforward to the following tax year.
Paycheck protection program (PPP) loan forgiveness. Any indebtedness that was forgiven on a loan covered under the PPP that was excluded from federal gross income must be added back as an adjustment for NY.
Depreciation of qualified improvement property (QIP). Depreciation of QIP that is calculated as greater than what it would have been under the rules in place prior to March 1, 2020, should be added back. If the amount is less than the total that would have been calculated, then this amount should be subtracted out.
Modifications of limitations on business interest. Any amount in excess of what would be allowed under previous law will be added back to federal AGI. Any amount of business interest not allowed as a deduction for any tax year by reason of this adjustment shall be treated as busines interest paid in the succeeding tax year. If, in a prior year, the taxpayer was required to add back an amount of business interest that was not allowable and required to be carried forward, this amount can be subtracted from federal AGI.
Deductions for charitable contributions (estate and trusts). For estates and trusts, any charitable deduction that was taken in excess of 50 percent of federal taxable income should be added back. Any amount that was added back in a prior year to be taken in a subsequent year can be subtracted.
Distributive share of adjustments to ordinary business income of a partnership. If there was an adjustment reported on a partnership that a taxpayer is a partner of, or an S corporation that a taxpayer was a shareholder of, and this adjustment was to ordinary income based on the state’s decoupling from the changes to the IRC, the amount will be either added or subtracted based on whether it is an addition or subtraction from the distributive share.
Beneficiary’s distributive share of adjustments to federal taxable income of an estate or trust. If there was an adjustment reported on an estate or trust that a taxpayer is a beneficiary of, and this adjustment was to ordinary income based on the state’s decoupling from the changes to the IRC, the amount will be either added or subtracted based on whether it is an addition or subtraction from the distributive share.
The changes coming up for tax year 2020 for New York will most certainly require more planning for tax implications in 2020 and the future. And, while the adjustments appear to only pertain to the CARES Act, it is worth mentioning that it does not stop there. Because the federal AGI is now recomputed, we must take a deeper look at some of the credits that are claimed on an individual’s tax return. For example, NY IT-213: Empire State Child Credit will have a recalculated amount because of the new federal AGI. This new adjustment for the IT-213 also requires that certain federal credits be recalculated.
The adjustments for the decoupling from IRC go much deeper than the surface, and will make for an intricate tax season for preparers and taxpayers.
Editor’s note: This article is also available in Spanish.