New York City Response to Bonus Depreciation

New York City Response to Bonus Depreciation

STT, 11/5/02

The New York City Department of Finance has issued a finance memorandum to describe certain retroactive federal and New York tax law changes and their impact on certain New York City taxpayers (No. 02-3).
02-3

September 26, 2002

FINANCE MEMORANDUM
New York City Tax Consequences of Certain Retroactive Federal and New York Tax Law Changes

[1] This Memorandum describes certain retroactive federal and New York tax law changes and their impact on certain New York City taxpayers.

JOB CREATION AND WORKER ASSISTANCE ACT OF 2002

Bonus Depreciation
[2] Background. The Job Creation and Worker Assistance Act of 2002, P.L. 107-147, (the "Act") allows taxpayers an additional 30 percent depreciation deduction in the first year "qualified property" is placed in service. The Act allows a similar additional 30 percent first-year depreciation deduction for "qualified New York Liberty Zone property" and allows "qualified New York Liberty Zone leasehold improvements" to be depreciated over a five-year period using a straight-line method. The Act also allows an additional first-year expense deduction of up to $35,000 for "qualified New York Liberty Zone property" under Internal Revenue Code ("IRC") § 179 in addition to the otherwise allowable deduction.

[3] New City Decoupling Provisions. Local Law 17 of 2002 amended the New York City General Corporation Tax ("GCT"), Unincorporated Business Tax ("UBT") and Banking Corporation Tax ("Bank Tax") law to limit the depreciation deduction for "qualified property" to the deduction that would have been allowed for such property under IRC § 167 had the property been acquired by the taxpayer on September 10, 2001, (and, therefore, not eligible for the enhanced deductions allowed by the Act.) However, this provision DOES NOT APPLY to "qualified property" that is "qualified Resurgence Zone property".

[4] Consequently, New York City business taxpayers who claimed the 30% bonus depreciation for "qualified property," other than "qualified Resurgence Zone property," "qualified New York Liberty Zone property" and "qualified New York Liberty Zone leasehold improvements," on a return filed for a tax year ending after September 11, 2001 should file an amended return for that year. See "Who must file" below.

NOTE: the depreciation deductions for "qualified Resurgence Zone property," "qualified New York Liberty Zone property" and "qualified New York Liberty Zone leasehold improvements" and the additional first-year expense deduction under Internal Revenue Code § 179 for "qualified New York Liberty Zone property" are the same for New York City GCT, UBT and Bank Tax purposes as for Federal tax purposes.

[5] The amendments made by Local Law 17 also require appropriate adjustments to the amount of any gain or loss included in entire net income or unincorporated business entire net income upon the disposition of any property for which the federal and New York city depreciation deductions differ.

Definitions.

[6] "Qualified property" (as defined in IRC § 168(k)(2)) generally includes certain personal property acquired after September 10, 2001 and before September 11, 2004 and placed in service after September 10, 2001 and before January 1, 2005 or 2006 in certain circumstances.

[7] "Qualified New York Liberty Zone property" (as defined in IRC § 1400L(b)(2)) generally includes the same types of personal property if used substantially in the New York Liberty Zone in connection with the active conduct of a trade or business in the New York Liberty Zone where the original use began with the taxpayer in the Liberty Zone after September 10, 2001. It also includes certain real property acquired to replace property damaged or destroyed in the attacks on the World Trade Center on September 11, 2001.

[8] The New York Liberty Zone generally encompasses the area of the borough of Manhattan below Canal Street. For New York City tax purposes, property that qualifies as both "qualified property" and "qualified New York Liberty Zone property" will be eligible for enhanced depreciation and IRC § 179 benefits as "qualified New York Liberty Zone property."

[9] "Qualified Resurgence Zone property" is "qualified property" used substantially in the Resurgence Zone in connection with the active conduct of a trade or business where the original use began with the taxpayer in the Resurgence Zone after September 10, 2001.

[10] The Resurgence Zone (defined in sections 11-507(22) and 11-602.8(m) of the Administrative Code) generally encompasses the area in Manhattan between Canal Street and Houston Street.

[11] Who Must File. Taxpayers who filed New York City GCT, UBT or Bank Tax returns for tax years ending after September 10, 2001 and who claimed the enhanced depreciation benefits for "qualified property", other than "qualified Resurgence Zone property," "qualified New York Liberty Zone property" or "qualified New York Liberty Zone leasehold improvements," must file amended returns for any such tax year to properly report the depreciation deductions for such property and to pay any additional tax due plus accrued interest. The correct depreciation deduction can be determined using new form NYC-399Z available on the Department's website: www.nyc.gov/finance. Taxpayers required to file amended returns should use the appropriate form (NYC-4S, NYC-3L, NYC-3A, NYC-202, NYC-204, NYC-1 or NYC-1A) making sure that the box for "amended return" is checked, and should include form NYC-399Z.

To ensure property processing of the amended return, it should be mailed to the New York City Department of Finance, 25 Elm Place, 5th Fl, Brooklyn, NY 11201, Attn: NYC-399Z Section, NOT to the Kingston NY post office box specified on the return.

[12] Taxpayers will not be liable for any late payment penalties for any additional tax paid with such an amended return as a result of the decoupling from federal depreciation deductions but they will be liable for interest on any additional tax due.

The New York Department of Taxation and Finance has issued a memorandum explaining how certain provisions of the federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) (JCWAA) relate to the New York corporate franchise (income), bank franchise (income), and insurance franchise (income) taxes.

For federal income tax purposes, the JCWAA provides special depreciation allowances for certain property under IRC Sec. 168(k) and for qualified New York Liberty Zone property. The special depreciation allowances provided by the JCWAA are allowed in the computation of the entire net income base on New York corporate franchise (income), bank franchise (income), and insurance franchise (income) tax returns. The special depreciation allowances are also allowed in computing minimum taxable income for New York corporate franchise (income) tax purposes.

For federal income tax purposes, the JCWAA also extends the general net operating loss (NOL) carryback period from two to five years for certain NOLs arising in taxable years ending in 2001 and 2002. An election is also available to disregard the five-year carryback and use the carryback period as it existed prior to the JCWAA. A taxpayer taking advantage of the five-year carryback for federal purposes must also use a five-year carryback in computing the NOL deduction for New York corporate franchise (income) or insurance franchise (income) tax purposes. NOL carrybacks are not allowed under the bank franchise (income) tax law.
The JCWAA also provides for the temporary suspension of the 90% limit on NOLs in computing federal alternative minimum tax. However, when computing New York minimum taxable income for corporate franchise (income) tax purposes, the New York alternative NOL deduction is limited to 90% of minimum taxable income.

In addition, the JCWAA extends the federal work opportunity tax credit for two years and expands it to treat New York Liberty Zone business employees as members of a targeted group for purposes of IRC Sec. 51. Accordingly, with respect to the New York corporate franchise (income), bank franchise (income), and insurance franchise (income) taxes, New York Liberty Zone business employees may be considered targeted employees for purposes of the empire zone and zone equivalent area wage tax credits for taxable years ending on or after 2001, provided that other requirements for targeted status are satisfied.

TSB-M-02(2)C, Technical Services Bureau, Taxpayer Services Division,New York Department of Taxation and Finance, August 2, 2002.

CCH, 7/8/02

For New York City general corporation (income), banking corporation (income), and unincorporated business tax purposes, with respect to certain property acquired after September 10, 2001 (other than qualified Resurgence Zone and New York Liberty Zone property), the legislation authorizes New York City to disallow accelerated depreciation deductions allowed by the amendment to IRC Sec. 168 made by the federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147). (Ch. 93 (A.B. 11817), Laws 2002, effective June 25, 2002.)

CCH, 6/24/02

On June 19, 2002, New York City Mayor Michael R. Bloomberg and New York City Council Speaker Gifford A. Miller announced an agreement on the city's fiscal year 2003 budget. Following the agreement, the New York state legislature and Governor George E. Pataki were expected to authorize legislation providing for an increase in the New York City cigarette tax rate, an additional New York City cell phone and landline E-911 surcharge, and the decoupling of New York City from the federal accelerated depreciation provision. (Press Release 157- 02, Office of the New York City Mayor, June 19, 2002.)