New York state Corporation Tax: Everything You Need to Know
New York state Corporation Tax must be paid by most corporations in New York, including those registered in the state or just doing business there.3 min read
2. Tax Exemptions for New York Organizations
3. How the Tax Cut and Jobs Act Affects New York Taxes
New York state Corporation Tax must be paid by most corporations in New York, including those registered in the state or just doing business there. The company's gross taxable income is the basis of the tax.
Just as individuals need to pay personal income tax, corporation income tax is the business world's equivalent. Also, like personal income tax, corporation tax has a tax system with brackets indicating the percentage they must pay. Businesses have to file a tax return each year and can claim deductions on certain types of expenses incurred throughout the year.
Which Businesses pay Income Tax?
Not all businesses are subject to corporate income tax. If a New York business is registered as a pass-through entity, all profits pass directly to owners, and it is not required to pay tax at the corporate level. These include sole proprietorships, partnerships, and S corporations. The income they receive from their businesses is reported on their personal tax return as income.
C corporations are the most common business type that is subject to both federal and state income taxes. Due to the business structure, shareholders and owners of C corporations must report distributions they receive from the business as dividends on their personal income tax return, and pay applicable taxes. In addition, C corporations pay corporate tax on the same revenue. This results in double taxation.
Regardless of whether a business is subject to corporate income tax, it needs to file an annual tax return with the New York Department of Revenue, along with a federal return to the IRS, for informational purposes if it's incorporated.
Tax Exemptions for New York Organizations
Some nonprofit organizations registered in New York are eligible to exempt income or revenue from state and federal taxation. To do this, they need to be certified as a 501(c) corporation in the state under the Internal Revenue Code (IRC).
- Charities certified as 501(c) (3) entities are automatically exempt. These include charities run by religious organizations, as well as those not affiliated with a religion.
- Labor unions are also tax-exempt, as are many other types of worker's organizations. They require certification under 501(c) (4) and 501(c) (5).
- Recreational and social groups often collect dues and raise funds; these remain tax-free if the group is a nonprofit organization covered under 501(c) (7).
- Churches, mosques, synagogues, and other religious organizations are tax-exempt; their certification is 501(c) (7).
- Scientific groups and educational institutions, which include nonprofit schools or colleges as well as some research facilities, are also tax-exempt and covered under 501(c) (3).
How the Tax Cut and Jobs Act Affects New York Taxes
The New York Legislature passed the 2018-19 Budget Bill in March 2018. It concerned several parts of the Tax Cuts and Jobs Act, enacted by the federal government. The Budget Bill's goal was to minimize any effects arising from the federal act's limitation on deductible expenses. New York's tax laws use federal taxable income as the basis for calculating state taxable income, so a change in the amount of taxable income on federal tax returns directly affects state and local taxes as well.
Here are a few ways that the Budget Bill addresses changes in the federal tax law:
- Transition Tax is an IRS-imposed on some foreign corporations, but the Budget Bill declares certain earnings taxed by the Transition Tax as tax-exempt on state and city returns. It also lessens the penalty for underpaying estimating taxes during the year
- Foreign Derived Intangible Income received by a U.S. Corporation is subject to federal income tax; the Tax Cut and Jobs Act raised the percentage of this income businesses can claim as a deduction. The New York Budget Bill disallows this deduction.
- The New Employer Compensation Expense Program created by the Budget Bill offers New York employers an option to pay an extra percentage of payroll tax on salaries over $40,000 per year. The employees are then given a credit on their personal state tax return for this amount. The payroll tax is deductible on the corporation's income tax return, so both the employer and employee will benefit.
- Charitable Gifts and Trust Funds: The Budget Bill allows taxpayers to contribute to one of two state-operated charitable funds, and these contributions count as a credit against the amount of tax due on their state tax return. The state charitable funds go toward improving health care and education.
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