Starting the new year off with legislation aimed directly at the pockets of corporate taxpayers, New York has issued a legislative proposal to nearly cut in half corporate taxpayers’ available GILTI exemptions, and at the same time almost double the top corporate franchise tax rate. Senate Bill 953 (“SB953”), pre-filed in the state senate on January 8, 2025, has the potential to significantly increase New York franchise tax exposure for corporations doing business in the state, particularly those with substantial taxable income and sizeable GILTI inclusions.
Generally, the starting point for the computation of New York corporate franchise tax is a taxpayer’s federal taxable income, subject to various adjustments. However, “exempt CFC income” is excluded from the tax base. Under current law, exempt CFC income includes, among other items, 95% of the gross Global Intangible Low-Tax Income (“GILTI”) that is required to be included in federal taxable income under IRC § 951A(a), without regard to the GILTI deduction available under IRC § 250, that is received from a corporation not included the taxpayer’s combined reporting group. SB953 would reduce the permissible exclusion from 95% of the federal GILTI inclusion to only 50% of the federal GILTI inclusion. In other words, taxpayers would now have to include 50% of their federal GILTI inclusion in their New York tax base—a stark increase from the 5% inclusion required under current law. Taxpayers would also include 50% of GILTI in the denominator of their apportionment factor (current law matches the 5% income inclusion by requiring 5% of GILTI to be included in a taxpayer’s apportionment factor denominator).
At the same time, SB953 proposes to increase the top applicable corporate franchise tax rate from 7.25% to 14%. Currently, taxpayers with business income of more than $5 million are taxed at the 7.25% rate, while other business taxpayers (aside from qualified emerging technology companies and qualified New York manufacturers, which are taxed at reduced or 0% rates), are taxed at the rate of 6.5% of business income. SB953 would raise the tax rate for businesses with more than $2.5 million of business income to 8%, would subject taxpayers with more than $10 million of business income to a 12% rate, and would impose a 14% rate on taxpayers with business income in excess of $20 million. The bill also proposes an additional tax on an individual with New York taxable income in excess of a threshold amount, that corresponds to that individual’s IRC § 199A qualified business income deduction.
Although New York would not be alone in taxing 50% of a taxpayer’s federal GILTI inclusion—a number of the northeastern states, including Vermont, New Hampshire, and Maine, currently tax 50% of GILTI—the one-two punch of the GILTI exclusion cut and the tax rate increase have the potential to significantly impact taxpayers with global operations doing business in New York and receiving GILTI. Indeed, neighboring New Jersey went the exact opposite route over the past year and a half. For tax years ending before July 31, 2023, New Jersey only permitted a 50% GILTI deduction; however, effective for tax years ending on or after July 31, 2023, New Jersey treats GILTI as a dividend and effectively allows for a 95% GILTI deduction. California and Illinois—two states whose corporate tax rates currently exceed New York’s top rate—do not tax GILTI at all. Thus, New York’s concurrent proposals do cause it to be somewhat of an outlier in terms of taxing GILTI at a high percentage, and at a high rate. Additionally, this proposal is particularly concerning for corporations that are subject to the New York City business corporation tax, which requires taxpayers to include net GILTI (i.e., the federal GILTI inclusion less the accompanying federal GILTI deduction) in their tax base. Finally, there is a serious question as to whether states can constitutionally conform to the GILTI regime in some respects (for example, by conforming to the income inclusion and deduction provisions) but not in other respects (for example, by failing to conform to the federal tax credit provisions) and as to the appropriate factor representation.
The bill sponsors, for their part, did not hide the intent of the bill. The sponsor memorandum to SB953 states that the purpose of the bill is to “generate increased tax revenue for New York State by addressing the federal under-taxation of corporate profits and pass-through business income as a result of the 2017 Tax Cuts and Jobs Act.” At this time, the bill has been referred to the Senate Budget and Revenue Committee.
It is unclear at this point how much support SB953 will garner, and whether the bill will progress out of committee. SB953 was filed as a stand-alone bill, which tend to face more practical challenges than comprehensive legislative packages. However, the New York Budget Bill, which includes the Department of Taxation and Finance’s input on tax legislative proposals, is expected to be proposed soon, and it remains to be seen whether either the GILTI exclusion cut or the tax rate hikes will make their way into that legislation. The Baker McKenzie SALT team will be monitoring the status of both the stand-alone bill and the larger Budget Bill and will continue to advise on any relevant developments.