William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Will New York’s businesses suffer because the state tax system rejected adopting the CARES Act tax reliefs?

Posted by William Byrnes on April 15, 2020

  • Deloitte covers New York’s new budget that purposefully ‘decouples’ from the CARES Act tax relief for New York based business and other states’ business that have income within New York.
  • BDO explains it here as well.
  • Pillsbury here.

Anything that improves the employment of tax professionals, I am for.  Thus, states with their own tax codes that do not correspond to the federal Internal Revenue Code, at least for my students and alumni, are OK by me.  Unless I own a business.  Then it’s maddeningly complex, and compliance expensive, to operate in several tax regimes.

Not saying that the CARES Act provisions made good tax policy sense.  But unless New York state (and city) has something better to offer, the Covid-19 meltdown does not seem like an opportune time to ‘stick it’ to Congress’ because Congress seems to enact ineffectual tax provisions. Not that the typical New York voter understands or cares about 163(j) relief or NOL. And arguably, most voters do not feel sympathy for the large business and investment partnership vehicles (at least until I remind them that it is their retirement accounts that own the majority of the publicly held businesses and investment vehicles, and thus they’ll be working a little longer than they hoped for).

New York based business in particular may come to understand when the CPA / tax advisor informs that on the federal return Covid-19 stimulus relief is allowable but not so on the NY state return. Some NY based businesses are going to feel that their state didn’t have their backs.  Other businesses that are large enough and able because of industry to relocate operations have time a plenty at this moment to think about such relocation.  (Texas will be open for business again soon).

Should a New York business look toward the SBA loan to the tax provisions like the employee retention tax credits? New York’s decoupling (where a state goes its own way) may impact the analysis.  In general, leaving aside the decoupling issue, for a business with by example 400 employees, a $5,000 credit per employee is worth $2,000,000 of tax-free tax credit that can be more beneficial than an SBA Loan.  The SBA loan is not straight forward and regardless, is not in general allowed for business above 500 employees.  The taxpayer must choose either one or the other – the PPP (forgivable employee retention) SBA loan or the employee retention tax credit.  For small employers with less than say 250 employees (not exactly ‘small’ in most American minds) the answer is probably the SBA loan.  But above 250, careful consideration and analyzing the benefits/outcomes of each program must be weighed.

For a business with by example 400 employees, a $5,000 credit per employee is worth $2,000,000 of tax-free tax credit that may be more beneficial than an SBA Loan depending on the ‘facts and circumstances’ of the business. The SBA loan is not straight forward and regardless, is not in general allowed for the business above 500 employees. The SBA loan is allowed, for the small businesses that qualify, for up to 2.5 times a business’ average monthly payroll costs, up to $10 million.  So by example, just to put some numbers to this statement, if a business has 400 employees, and each employee is paid $3,000 a month with benefits (basically 22 days a month at $15 / hour with full medical), the monthly payroll will be $1.2 million. 2.5 times is thus $3 million even. A forgiven tax-free $3 million is great.

The $5,000 worth of employee retention tax credit is only worth $2 million for the 400 employees, right?  Not necessarily.  Maybe but we need to work through the numbers of the business. Another way to look at the value of the tax credit is that it is worth the tax rate cost to generate the income for the taxpayer for which the tax credit offsets the tax due.  Say this taxpayer is a pass-through and pays an effective 33% (after the Internal Revenue Code Section 199A “20% deemed business income deduction” reduces the 37% highest rate, and factoring in the state tax burden).  So the taxpayer’s $2 million credit offsets the tax on $6 million income (assuming the state recognizes the credit).

So now another step in the potential analysis. Let’s say the business recovers and both businesses earn $6 million income.  The business with the SBA loan has $3 million taxfree after forgiveness plus $4 million aftertax, thus $7 million.  The tax credit business has $6 million tax-free. The tax credit company appears worse off but not by the initial $3 million SBA loan, right?  Many other factors are required for the analysis to weigh both paths.  The 2-year deferred payroll tax, whether the business will generate net earnings this year, the SBA additional forgiveness potential for non-employee expenses, whether the SBA loan money has already run out, how long to monetize the tax credits, .. these issues come to mind.

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