On March 31, 2014, New York Governor Andrew Cuomo signed the state's fiscal year 2014-2015 (FY 14-15) executive budget legislation. The legislation overhauls the state's corporate tax regime and makes other changes to various tax provisions. Important changes include: eliminating the bank franchise tax and subjecting all corporations to a revised corporate franchise tax, reducing the corporate tax rate from 7.1% to 6.5%, implementing a new unitary combined reporting system, revising net operating loss provisions, establishing a single receipts factor apportionment formula with customer sourcing provisions, and providing for multiple tax credits.
Accounting Standards Codification (ASC) Topic 740, Income Taxes, requires filers to measure current and deferred income taxes based upon the tax laws that are enacted as of the balance sheet date of the relevant reporting period. Companies should review the tax law changes in detail to determine the financial statement impacts. Discussed below are potential ASC 740 considerations relating to the several aspects of new law. For a more detailed discussion of the provisions within the legislation, please see PwC's Tax Insights publication, New York tax reform enacted, dated April 2, 2014.
New York Governor Andrew Cuomo signed into law the state's FY14-15 executive budget legislation. The legislation was signed in the final hours of March 31, 2014, which as a result requires companies to report the tax accounting effects of the new law in the first quarter for calendar year financial statement filers.
The legislation repeals the bank franchise tax (Article 32) and subjects all corporations to a revised corporate franchise tax (Article 9-A) for tax years beginning on or after January 1, 2015. The legislation also reduces the corporate tax rate from the current rate of 7.1% to 6.5% effective for tax years beginning on or after January 1, 2016. In addition, companies that meet the requirements to be considered a "qualified New York manufacturer" will be subject to a tax rate of 0% on its Entire Net Income tax base for tax years beginning on or after January 1, 2014.
The state's apportionment rules have also been revised so that business income and capital are apportioned using a single receipts factor with a complex series of customer based sourcing rules.
ASC 740 requires companies to measure current and deferred income taxes based on the tax laws enacted as of the balance sheet date of the relevant reporting period. Additionally, deferred tax assets and liabilities are measured based upon the enacted law that will apply when the corresponding temporary differences are expected to be realized or settled. As a result, legislation having an effective date in the future (e.g., the corporate rate reduction included in the New York legislation) will often nonetheless cause an immediate financial reporting consequence.
When a tax law change occurs during an interim reporting period, adjustments to the deferred tax assets and liabilities, which were accounted for as of the beginning of the year, should be reported discretely in continuing operations in the period of enactment. However, the effects of a change in tax law on temporary differences originating in the year of enactment should be reflected in the estimated annual effective tax rate calculation.
Companies should consider the changes in the tax rate, as well as the changes in apportionment to determine the proper accounting.
For tax years beginning on or after January 1, 2015, New York will require combined filing for companies engaged in a unitary business with affiliates that meet certain ownership requirements. The legislation replaces the existing combination provisions, which require combination based on the existence of substantial inter-corporate transactions.
With the repeal of the bank franchise tax mentioned above, financial institutions may become includible (for tax years beginning on or after Janurary 1, 2015) in a combined return with non-bank subsidiaries.
In applying ASC 740, companies should consider which members will be included in future New York combined returns. In addition to the effect on measuring deferred taxes, this can also have an impact on the realization of existing deferred tax assets (i.e., reassessment of an established valuation allowance).
The legislation revises the state's existing net operating loss provisions and introduces a new 'prior net operating loss (PNOL) conversion subtraction' concept. In computing business income, taxpayers are allowed both the PNOL and a net operating loss deduction (NOLD). The PNOL will be applied against the business income base before the NOLD. The amount of the PNOL deduction is subject to specified limitations each year.
Companies will need to estimate the amount of NOLs expected to be carried over to the first taxable year beginning after January 1, 2015 to determine the appropriate PNOL deferred tax asset to be recorded. When considering the need for a valuation allowance against a PNOL deferred tax asset, a significant scheduling exercise may be necessary given the extended period of time allocated to utilize the PNOL (January 1, 2036) and the interplay with the annual loss limitation.
The legislation reforms many of the state's tax credit provisions and provides for a new Investment Tax Credit (ITC) with respect to qualified depreciable property that is located in the state. Additionally, the legislation creates a tax credit for qualified New York manufacturers equal to 20% of real property tax paid on property used for manufacturing.
Companies should review the credits they expect to qualify for in New York and determine the appropriate treatment of each type of credit. Credits that do not have a direct relationship to taxable income or are refundable are generally not accounted for under ASC 740. Companies should apply judgment to determine the appropriate accounting policy and classification, which should be applied consistently and disclosed where appropriate.
The legislation provides for an increased cap with regards to the capital base tax. The capital base cap for corporations, not qualifying as manufacturing corporations, is increased to $5 million from its current cap of $1 million. The cap for manufacturers remained unchanged at $350,000.
The capital base tax rate will be gradually phased to 0% by 2021.
Franchise taxes based on capital are explicitly scoped out of ASC 740 and would be reported outside of the income tax accounts. When jurisdictions impose a franchise tax that is computed as the higher of a tax based on income or a tax based on capital, as is the case with New York, only the amount in excess of the capital based tax is reported in the income tax accounts .
Accordingly, companies need to consider which tax base will apply in determining the applicable tax rate that is used to compute deferred tax assets and deferred tax liabilities for temporary differences and carryforwards. It may be necessary to schedule temporary difference reversals in order to properly account for deferred tax balances.
Companies should consider disclosures in their financial statements to explain the impact of tax law changes. It may be necessary to show the effects of changes in tax laws as a separate item within a reconciliation of the effective tax rate in the company's annual financial statements.
For certain filers it may be necessary to consider changes in tax laws that are enacted subsequent to the balance sheet date, but before the financial statements are released. With regards to the New York legislation this could be important to non-calendar year filers, as well as 52/53 week fiscal filers. If significant, the effect on the existing deferred tax assets or liabilities should be disclosed.
The legislation signed into law represents a significant effort to reform the New York State's tax system, which many constituents had described as being overly complex.
The legislation was signed into law on March 31, 2014, and therefore, is a first quarter financial statement event for calendar year filers. Companies should caref ully consider the income tax accounting implications as the legislation could have immediate and ongoing tax accounting consequences for many organizations.Access a PDF copy of the article on PwC.com.
For a deeper discussion of how the New York tax reform might affect your business, please contact:
Ken Kuykendall, Partner
Global & US Tax Accounting Services Leader
+1 (312) 298-2546
o.k.kuykendall@us.pwc.com
Robert Ozmun, Partner
State & Local Tax
+1 (617) 530-4745
robert.c.ozmun @us.pwc.com
John Schmitt, Manager
US Tax Accounting Services
+1 (312) 298-3272
john.schmitt@us.pwc.com
Steven Schaefer, Partner
National Professional Services Group
+1 (585) 231-6129
steven.schaefer@us.pwc.com
Benjamin Luedeke, Director
State & Local Tax
+1 (646) 471-0677
benjamin.luedeke@us.pwc.com
Patrick Brisley, Senior Manager
National Professional Services Group
+1 (973) 236-5324
patrick.d.brisley@us.pwc.com