The New York Legislature passed a budget bill (“NY Budget Bill”) that takes aim at several key provisions in the federal tax reform bill known as the Tax Cuts and Jobs Act (“Federal Tax Reform”). It has been no secret that Governor Cuomo was displeased with Federal Tax Reform, and this year’s NY Budget Bill reflects that displeasure.  Among other items, the NY Budget Bill contains two provisions designed to mitigate Federal Tax Reform’s limit on the deductibility of state personal income taxes—first, the NY Budget Bill creates state-operated charitable contribution funds and provides taxpayers with a credit against their New York State income tax liability equal to 85 percent of the amounts contributed for the immediately proceeding tax year, and second, the Budget Bill creates an optional payroll tax (the “Employer Compensation Expense Tax”) for which employees will receive a credit against their New York State income tax liability (effectively shifting the tax expense and corresponding deduction from the employees to the employer).  The NY Budget Bill also addresses some of the corporate income tax changes adopted under Federal Tax Reform, including Internal Revenue Code (“IRC”) section 965 income and the deduction found in IRC § 250(a)(1)(A) (“FDII”).  In this blog, we will focus on the provisions of the Budget Bill impacting corporate taxpayers under the New York State corporate franchise tax.


By way of background, corporations that are subject to the New York franchise tax must pay the highest of three different taxes: (1) a tax on business income, (2) a tax on capital, and (3) a fixed dollar minimum tax. For purposes of computing the tax on business income (which is the primary tax base), business income is computed as entire net income (“ENI”) minus investment income and other exempt income (i.e., neither investment income nor other exempt income are subject to tax in New York).  ENI is federal taxable income subject to certain modifications.  New York is also a “rolling conformity” state, meaning that absent specific action, New York’s Tax Law automatically conforms to changes to the IRC, including the changes adopted by Federal Tax Reform for purposes of computing ENI.

IRC Section 965 – Toll Charge

Federal Tax Reform contains a one-time income inclusion in IRC section 965 for the undistributed, previously untaxed post-1986 foreign earnings and profits of certain U.S.-owned businesses (“deemed repatriation income”). Federal Tax Reform also permits a deduction in IRC section 965(c) for a percentage of the deemed repatriation income to achieve a lower federal effective tax rate for this income.

In January, the New York State Department of Taxation and Finance released its Preliminary Report on the Federal Tax Cuts and Jobs Act (“Department Report”) and addressed IRC section 965, concluding that the deemed repatriation income “would be considered other exempt income that is exempt from tax under New York law.” However, the Department also recommended that to prevent an inappropriate taxpayer windfall (which would arise from the exclusion of the deemed repatriation income from the New York tax base), the “State should enact a new statutory income add-back for the IRC § 965(c) deduction.”

As discussed above, other exempt income is subtracted from ENI for purposes of computing taxable income in New York. Under the New York Tax Law, “other exempt income” includes “exempt CFC income.”  Currently, the definition of exempt CFC income is the income required to be included in the taxpayer’s federal gross income pursuant to IRC § 951(a), received from a corporation that is conducting a unitary business with the taxpayer but that is not included in a combined report with the taxpayer, less any interest deductions directly or indirectly attributable to that income.  As a result, income included under IRC § 951(a) from a corporation that was not conducting a unitary business with the taxpayer would not qualify as exempt CFC income.

The NY Budget Bill explicitly addresses the treatment of deemed repatriation income, including deemed repatriation income from a non-unitary corporation, and follows the recommendation in the Department Report regarding the corresponding deduction in IRC § 965(c). First, the NY Budget Bill adds a new category of “exempt CFC income” to specifically address deemed repatriation income and provides that such income would qualify as “exempt CFC income” regardless of whether the income is received from a unitary corporation.  The Budget Bill also provides that the new category of exempt CFC income (i.e., deemed repatriation income) cannot be investment income for New York purposes.  Additionally, the Budget Bill decouples from the deduction in IRC § 965(c) by requiring an addback of any IRC § 965(c) deduction amounts.


Federal Tax Reform introduced a new category of income – global intangible low-taxed income (“GILTI”). The GILTI provisions are contained in new IRC section 951A, which is within Subpart F of the Internal Revenue Code. Federally, GILTI is taxed at a reduced effective rate of 10.5 percent (13.125 percent beginning in 2026).  This reduced effective tax rate is achieved by a deduction under new IRC § 250 equal to 50 percent (37.5 percent beginning in 2026) of the GILTI addition plus any corresponding IRC § 78 gross-up.

Additionally, IRC § 250(a)(1)(A) allows a deduction equal to 37.5 percent (21.875 percent beginning in 2026) of the taxpayer’s foreign-derived intangible income (“FDII”). The FDII deduction and GILTI provisions operate in tandem, providing a carrot and stick—GILTI discourages corporations from locating intangibles in low-tax foreign jurisdictions and FDII encourages the location of intangibles in the U.S.

The Department’s Report provides that because GILTI “is not characterized as Subpart F income under the IRC … [it] would not qualify as other exempt income” (which in New York is limited to income included under IRC § 951(a)) and, would thus be taxed as business income in New York. The Department’s Report also concludes that the GILTI and FDII deductions provided in IRC § 250 “would also flow through to New York and would not be subject to add-back because they are not dividends received deductions.”

The NY Budget Bill decouples from FDII by requiring an addition modification for “the amount of any federal deduction allowed pursuant to section 250(a)(1)(A) of the internal revenue code.” Although the Budget Bill does not address GILTI, as a result of New York’s conformity to the IRC, New York should adopt the GILTI provisions in a manner similar to that described in the Department’s Report (i.e., include GILTI in income but permit the corresponding deduction in IRC § 250). Thus, in New York, it seems that taxpayers have been hit with the stick but will not be receiving any carrots.

It is interesting to note that while the NY Budget Bill specifically provides that deemed repatriation income cannot qualify as investment income, the NY Budget Bill (and the Department’s Report) are silent as to whether GILTI can qualify as investment income (which, as discussed above, is another category of income not subject to tax). Under the New York Tax Law, investment income is income from investment capital.  Investment capital is “investments in stocks” meeting certain requirements (i.e., stocks that (1) satisfy the definition of a capital asset under IRC § 1221, (2) are held by the taxpayer for investment for more than one year,  (3) the dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the IRC, (4) for stock acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business, and (5) before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment).  Taxpayers should consider whether current and future investments that may produce GILTI income can qualify as investment capital in New York and should comply with the identification requirement for any future investments to ensure qualification.

To the extent the GILTI is included in the New York tax base, taxpayers should also consider apportionment factor representation for any CFC that produced the GILTI income.

Bonus Depreciation and Interest Expense

Federal Tax Reform contains a revised IRC § 168(k), which allows taxpayers to fully and immediately expense certain property acquired and placed into service between September 27, 2017 and January 1, 2023. This 100 percent depreciation deduction replaces bonus depreciation under prior law, which offered accelerated (but not full, 100 percent) depreciation.  Additionally, in new IRC § 163(j), Federal Tax Reform limits a taxpayer’s interest deduction to 30 percent of the taxpayer’s adjusted taxable income, as that term is defined in the IRC, and permits taxpayers to carry forward any disallowed interest expense indefinitely into the future. This interest limitation applies to interest on debt with both related and unrelated lenders.  Taken together, these provisions were intended to encourage investment in the U.S. but discourage such investments through strictly debt financing.

While the NY Budget Bill does not directly address IRC §§ 168(k) and 163(j), the New York Tax Law already decouples from IRC § 168(k) and, thus, will continue to do so. Additionally, given New York’s conformity to federal taxable income, New York will also conform to IRC § 163(j).  As discussed above, the IRC section 163(j) limitation on interest expense was intended to operate in conjunction with the immediate expensing provided by IRC section 168(k). Unfortunately, like GILTI and FDII as discussed above, New York has ignored the clear Federal Tax Reform policy objectives.  Consideration should now be given to computing the interest deduction limitation for New York purposes given that the state and federal filing groups may differ.  Additionally, New York already requires the add-back of certain interest expenses (e.g., interest attributable to investment income and other exempt income) so taxpayers must consider how any federal limitation will apply to various categories of interest.  A reasonable solution may be to apply any federal interest limitation ratably to the various categories of interest.


As a result of the NY Budget Bill, New York will essentially conform to the corporate base broadening provisions of Federal Tax Reform (i.e., GILTI, limitations on interest deductibility) without adopting any of the corresponding benefits found in Federal Tax Reform (i.e., full and immediate expensing, FDII, rate reductions). This move by the New York State Legislature confirms the suspicions of many corporate taxpayers that states would “cherry pick” their conformity to Federal Tax Reform, thereby undermining the overarching policy objectives of Federal Tax Reform.  The Department has also recently indicated that it is developing guidance in response to the Budget Bill and encouraged taxpayers to wait to file tax returns until further guidance is issued.  Taxpayers should evaluate the impact of the Budget Bill provisions on their businesses and identify areas where additional guidance may be needed (e.g., application of the interest limitation under IRC § 163(j)).

Contact the Authors:  Maria Eberle and Lindsay LaCava