A recent Advisory Opinion1 issued by the New York State Department of Taxation and Finance substantially increases the personal income tax payable by many residents and nonresidents with significant real estate investments. The opinion holds that an individual is required to increase her income for New York personal income tax purposes by the amount of federal bonus depreciation taken, but she may not offset such additional New York income by her passive losses because those passive losses are not being deducted for federal tax purposes. Although the result is harsh, it may be difficult to persuade the Tax Appeals Tribunal to overturn it.
Background
To understand the issues addressed in the opinion, it is useful to recall the basic structure of the New York State personal income tax (PIT). Like many states, New York’s PIT for both residents and nonresidents starts with federal adjusted gross income (AGI) under Internal Revenue Code (IRC) section 63.2 The New York Tax Law then provides for various modifications, both increases and decreases, to federal AGI in order to compute New York AGI.3 Various personal deductions are then taken against New York AGI to compute New York taxable income.4
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