Tax Changes in New York State’s 2021 Budget

Governor Cuomo has released details of New York State’s Fiscal Year 2021 budget, which includes several tax rate changes all businesses in the state should know about.

Touted by the state Senate to accelerate economic recovery and “equitably fund crucial services,” the budget bill aims to accomplish these goals primarily through tax hikes for the state’s highest earners and corporations.

But owners of New York partnerships and S Corporations will still make out ahead, with a new entity tax rate that provides a workaround to the federal $10,000 cap on state and local tax deductions.

Personal Income Tax Rates

Under the new budget, personal income tax rates on incomes over $1 million will change as follows:

  • Taxable income over $1 million ($2 million joint): raised from 8.82% to 9.65%
  • Taxable income of a least $5 million and not over $25 million: 10.3%
  • Taxable income exceeding $25 million: 10.9% or more

These changes are effective for the 2021 tax year and expire on December 31, 2027. Added to New York City tax rates, New York City’s highest earners will now pay the highest combined state and local income taxes in the nation.

Corporate Tax Rates

Certain corporate tax rates are also impacted by the new budget:

  • Corporate Franchise Tax Rate increased from 6.5% to 7.25% for three years for companies with revenues of $5 million or more
  • Capital Base Test restored at a rate of 0.1875% for companies other than coops, manufacturers and small businesses

Pass-through Entity Rate

However, it is not all bad news for business owners. Like the New Jersey legislature did last year, the budget creates a new pass-through entity tax rate that eligible partnerships and S corporations can elect as a workaround to the $10,000 federal cap on SALT deductions. The owners then receive a credit against their gross income tax equal to each member’s share of distributive proceeds paid by the pass-through entity. The tax is effective for taxable years beginning on or after January 1, 2021, at the following rates:

  • Income of $2 million or less: 6.85%
  • Income over $2 million but not over $5 million: $137,000 plus 9.65% of the excess over $2 million
  • Income over $5 million but not over $25 million: $426,500 plus 10.30% of excess over $5 million
  • Income over $25 million: $2,486,500 plus 10.90% of the excess over $25 million

Pass-through entities have until October 15, 2021 to make the election, but the bill is not clear on how this affects individual estimated Q1 2021 payments due on April 15. Please consult with your Grassi tax advisor to ensure compliance before and after the election is made.

If you or your business are affected by these changes, it is crucial to execute income tax mitigation planning strategies to minimize the impact of these changes on your current and future wealth.

Jeffrey G. Cohen Jeffrey G. Cohen, CPA is the Partner-in-Charge of Tax Services at Grassi. With over 30 years of experience, Jeff specializes in serving companies within the Manufacturing and Distribution Industry, with an emphasis on the Food & Beverage and Pharmaceutical sectors. A leading tax expert in the New York Metropolitan area, Jeff has enabled his clients to realize significant tax savings through proper Income and... Read full bio