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Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group. The weekly reports are intended to go out within 24 hours of the Division of Tax Appeals’ (DTA) publication of new ALJ Determinations and Tribunal Decisions. In addition to the weekly reports TiNY may provide analysis of and commentary on other developments in the world of New York tax law.  

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TiNY Special Edition: Starting the year off right (January 5, 2021)

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I noticed that the New York State Department of Taxation and Finance (the “Tax Department”) posted here the instructions to the 2020 Form IT-558 this week. The Form purports to explain the Personal Income Tax addition/subtraction modifications implicated by the CARES Act and New York’s partial de-coupling from it. In this version the Tax Department corrects a few positions set out in a draft Form IT-558 it floated about a month or so ago (the “Draft”).

Such a form is entirely necessary (indeed, something similar may be necessary for tax years prior to 2020 that were affected by the CARES Act). And I commend the Tax Department for circulating the Draft and then correcting it prior to issuing the final version. This is how government should work. In particular, I was pleased to read that the Tax Department had abandoned the Draft’s addition modification for income resulting from forgiven PPP loans.

Some background is necessary to understand my view of things. Let’s start with the CARES Act:

The CARES Act is not a tax bill. While it has amendments to the Federal Internal Revenue Code (IRC), it has many other provisions, including non-Code tax provisions and other provisions amending the Small Business Act and other non-tax laws. One non-Code tax provision is in CARES Act § 1106(i). And, with respect to PPP loan forgiveness it provides: “Canceled indebtedness under this section shall be excluded from gross income for purposes of the Internal Revenue Code of 1986.” This provision does not amend the IRC, it simply says how the IRC should be construed under a particular set of circumstances. Certainly an amendment to IRC § 61 could have obtained the same result. But Congress decided to go in a different direction. The absence of an amendment to the IRC is critical to our analysis. 

Now let’s look at the computation of New York adjusted gross income under the personal income tax:

New York’s starting point for computing income subject to tax is federal adjusted gross income (FAGI). New York applies addition and subtraction modifications to FAGI to determine New York adjusted gross income (NYAGI). If an item of income, gain, loss or deduction is in the computation of FAGI, and there is no modification to remove it, then it is in the computation of NYAGI. Likewise, if such an item is not in FAGI and there is no modification to add it in, then it is not in NYAGI. Simple, right? So, if Congress adopts a change in the IRC to remove an item from FAGI and the New York Legislature does not respond, the item is also removed from NYAGI.

Finally, how did New York decouple from the CARES Act?

In March, the New York Legislature, faced with increased COVID-response spending needs and decreased revenues from a COVID-depleted economy, determined that the additional hits to the State Fisc resulting from certain of the CARES Act IRC changes reducing FAGI were undesirable. Accordingly, in the 2020-2021 Budget, the Legislature adopted a provision “decoupling” from certain provisions in the CARES Act. But, at least as it pertains to personal income taxpayers, only those CARES Act provisions amending the IRC were negated by the Legislature. Here is the specific decoupling language from 2020 Laws of New York Ch. 58, Part WWW, § 2: “[Tax Law § 607(a) is amended to read as follows:] General. Any term used in this article shall have the same meaning as when used in a comparable context in the laws of  the  United  States relating  to federal income taxes, unless a different meaning is clearly required but such meaning shall be subject to the exceptions or  modifications  prescribed in this article or by statute. Any reference in this article to the laws of the United States shall mean the  provisions  of the internal revenue code of nineteen hundred eighty-six (unless a reference to the internal revenue code of nineteen hundred fifty-four is clearly intended), and amendments thereto, and other provisions of the laws  of the United States relating to federal income taxes, as the same may be or become effective at any time or from time to time for the taxable year. Provided however, for taxable years beginning before January first, two thousand twenty-two, any amendments made to the internal revenue code of nineteen hundred eighty-six after March first, two thousand twenty shall not apply to this article.” (Amendment is the highlighted language) 

Under the budget adopted by the Legislature (and signed by the Governor in early April), FAGI –the starting point for calculating NYAGI – is to be calculated through 2021 as if none of the amendments to the IRC adopted after March 1, 2020 – including those in the CARES Act – had occurred. Those would include, among others, amendments to IRC § 461(l) relating to excess business losses and IRC § 163(j) relating to business interest deduction limitations. However, since the CARES Act exclusion from FAGI for forgiven PPP loans is not an amendment to the IRC, the Legislature’s decoupling law should not result in the New York composition of FAGI being increased by the federally-excluded PPP forgiveness income. Thus, the exclusion should likewise be reflected in the computation of NYAGI.

I was surprised to hear that that the draft Instructions to the Form IT-558 required that, in computing NYAGI, personal income taxpayers were required to modify FAGI by adding back to it any CARES-Act-excluded debt discharge income from a forgiven PPP loan. Here is the draft instruction:

“A-007 Paycheck protection program loan forgiveness
If you had indebtedness that was forgiven on a loan covered under the federal Paycheck Protection  Program, Public Law 116-136, § 1106, and you excluded from federal gross income an amount per Public Law 116-136, § 1106(i), then enter such amount.” 

Inasmuch as the exclusion from FAGI for forgiven PPP loans is not an “amendment made to the internal revenue code … after March first two thousand twenty” I assume the Tax Department rescinded the draft to, among other things, reconsider the forgiven PPP loan modification to income. And therefore I was pleased that the current version posted on the Tax Department’s website now states:

“A-007 Intentionally omitted.”

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