Earlier this year, Congress passed and the president signed into law the CARES Act, P.L. 116-136, which, in part, granted tax relief to taxpayers to offset the impact of the COVID-19 pandemic on the economy. Many of the federal tax breaks would, in the ordinary course, be incorporated into the New York state and City corporate and personal (individual) income taxes. Presumably concerned with its diminished ability to fill its coffers, the New York state legislature quickly enacted legislation (L. 2020, ch. 58, part WWW) to "decouple" from parts of the CARES Act for purposes of both state and City income taxes. In the past few weeks, an additional bill (2020 NY Senate-Assembly Bill S8411, A10519) further decoupling has been proposed. New Yorkers will have to make sense of a patchwork of conformity and non-conformity between New York and federal law. Moreover, for New York taxpayers, the status of two popular aspects of the CARES Acts—the tax-free forgiveness of PPP (as defined below) loans and corrections to depreciation of QIP (as defined below)—is unclear.

The tax relief in the CARES Act largely consisted of statutory relief from certain revenue-raising amendments that the 2017 tax act, P.L. 115-97 (commonly referred to as the Tax Cuts and Jobs Act or TCJA) made to the Internal Revenue Code (IRC). One TCJA amendment, the revision of IRC §163(j), generally limited a taxpayer's deduction for business interest expense to 30% of that taxpayer's taxable income (with certain adjustments). The CARES Act permits, for 2019 and 2020, a 50% (rather than 30%) limitation, the use of (presumably higher) 2019 income for purposes of computing the 2020 limitation, and the use of a certain liberalized computation for partnerships. Another TCJA amendment, to IRC §172, generally limited net operating loss (NOL) deductions to 80% of a taxpayer's taxable income and eliminated NOL "carrybacks." The CARES Act, for 2018, 2019, and 2020, removes the 80% limitation and permits carrybacks for five years prior to the year in which the loss arises. One other TCJA amendment, the addition of IRC §461(l), generally disallowed for non-corporate taxpayers the deduction of a business loss against investment income. The CARES Act, for 2018, 2019, and 2020, eliminates the disallowance.

The CARES Act also made a technical correction—fixing what has been referred to as the "qualified improvement property" or "QIP" "glitch"—from the TCJA. The TCJA added QIP as a newly defined term, covering certain interior real estate improvements, for depreciation purposes. QIP was intended to have a 15-year depreciation period (instead of the 39-year period ordinarily applicable to nonresidential buildings), and, at the taxpayer's election, to be eligible for "bonus depreciation" (essentially, a one-year recovery period). However, due to a drafting error in the TCJA, QIP was not given the intended depreciation period, but was instead treated as general nonresidential real property, and was not eligible for accelerated or bonus depreciation. The CARES Act corrects this error, retroactive to the effective date changes made in the TCJA.

Finally, in a bit of tax relief unrelated to the TCJA, the CARES Act created a program to fund forgivable loans to certain small businesses (referred to as the Paycheck Protection Program or PPP) and provided that the forgiveness of such loans would not constitute income to the taxpayers whose loans were forgiven (contrary to the ordinary rules of IRC §§61(a)(11) and 108).

In general, a taxpayer (corporate or individual) computes its New York income taxes by first determining its taxable income for federal income tax purposes and then making specific adjustments thereto that either increase or decrease the amount of federal taxable income. For purposes of computing income for state and City purposes in general, individual taxpayers start with their adjusted gross income and make specific adjustments. See generally N.Y. Tax Law §§607(a), 611, 612, and 631, and N.Y.C. Admin. Code §§11-1707(a), 11-1711, and 11-1712. Usually, the applicable New York adjustments set forth in detail the adjustments that need to be made to specific items of income or deduction. However, due probably to the speed in which the CARES Act was enacted and the need to address the New York tax issues attributable to that law, the New York tax legislation took a significantly different approach.

Although business entity taxes were decoupled from the CARES Act on a provision-by-provision basis described below, the legislature decoupled the New York state and City personal income taxes from the CARES Act entirely. The statute provides that, for purposes of computing their 2019, 2020, and 2021 tax, individual taxpayers are to compute what would have been their federal adjusted gross income without regard to amendments made to the IRC after March 1, 2020 (which would include amendments made by the CARES Act). See N.Y. Tax Law §607(a) and N.Y.C. Admin. Code §11-1707(a) (both as recently amended). Although this seems like a simple approach, it is not without its complexities.

That the law decoupled from changes to the IRC effectively between March 1, 2020, and Dec. 31, 2021, means that any amendments to the IRC having nothing to do with the CARES Act but which are made prior to Jan. 1, 2022, would not apply to New York taxpayers for purposes of computing their state and City income for 2019, 2020, or 2021. Additionally, due to a quirk in the drafting of the CARES Act, individual taxpayers may receive the tax-free forgiveness of PPP loans for New York purposes, despite generally not receiving any CARES Act tax benefits for New York purposes. Unlike other provisions of the CARES Act, §1106(i), which provides for the effective tax-free loan forgiveness, does not actually amend the IRC; rather, it is a "freestanding" tax provision. As the New York decoupling separates only from amendments to the IRC, the tax-free forgiveness provision in the CARES Act arguably applies for New York purposes as well.

For the moment, the state business corporation franchise tax (which applies to C corporations), the City business corporation tax (BCT) (C corporations), the City general corporation tax (GCT) (S corporations), and City unincorporated business income tax (UBT) have decoupled from only one provision of the CARES Act: the permitting of 50% (rather than 30%) of taxable income for purposes of computing the business interest deduction under IRC §163(j). See N.Y. Tax Law §208(9)(b)(26) (franchise tax), N.Y.C. Admin. Code §§11-652(8)(b)(22) (BCT), 11-602(8)(b)(21) (GCT), and 11-506(b)(17) (UBT) (each as recently amended). To be clear, these business entities are currently not decoupled from the CARES Act change to IRC §163(j) permitting the use of 2019 income to compute the 2020 deduction, or the change applicable to partnerships (relevant only to the UBT). They are also not decoupled from any other aspect of the CARES Act, including the tax-free PPP loan forgiveness.

The proposed legislation would further decouple the City (but not the state) business entity taxes from other provisions of the CARES Act. For purposes of all City business entity taxes, the legislation would decouple from the remaining CARES Act changes to IRC §163(j) discussed above. For purposes of the GCT and the UBT (but not the BCT), the legislation would decouple from the changes to IRC §172. For purposes of the UBT, the legislation would decouple from the changes to IRC §461(l). (IRC §461(l) does not apply to corporations.) The proposed legislation would not decouple from the tax-free forgiveness of PPP loans.

In addition to the recent enacted and proposed decouplings, certain historic decouplings must be revisited in light of the CARES Act. Under a decoupling from nearly two decades ago, for purposes of the state individual income tax, the depreciation recovery period for property that is "qualified property" for bonus depreciation purposes is to be determined by reference to IRC §168 as enacted on Sept. 10, 2001. See N.Y. Tax Law §612(b)(8), (c)(16), and (k). While the intent of this provision was likely only to disallow bonus depreciation deductions, it potentially ensnares in its net other post-2001 changes to IRC §168—such as the accelerated 15-year recovery period for QIP! Analogous decouplings exist for purposes of the state franchise tax and the City UBT. See N.Y. Tax Law §208(9)(n-1) (franchise tax) and N.Y.C. Admin. Code §§11-507(20) and (21) (UBT).

The City individual income tax seems to have its own set of rules with respect IRC §168 (see N.Y.C. Admin. Code §§11-1712(b)(25) and (c)(26)); however, as individuals report their state and City income on a single return, the state rules practically control for these purposes.

Even with its issues, the wholesale decoupling of the individual taxes is a simpler approach, provided that tax preparers have a March 1, 2020, copy of the IRC handy. However, the mix-and-match approach to decoupling business taxes—aggravated by the proposed legislation—creates more of a headache than New Yorkers already had keeping track of their federal and New York differences.

Joseph Lipari is a partner and Aaron S. Gaynor is an associate at the law firm of Roberts & Holland.