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NEW YORK STATE TAX REFORM - 2014/2015 May 8, 2014 Grant Thornton LLP. All rights reserved.
NEW YORK STATE
    TAX REFORM
      2014/2015
May 8, 2014

© Grant Thornton LLP. All rights reserved.
NEW YORK STATE TAX REFORM - 2014/2015 May 8, 2014 Grant Thornton LLP. All rights reserved.
TODAY'S
 PRESENTER

                                             Matthew DiDonato
                                             Partner, SALT
                                             T: 212.542.9960
                                             E: matthew.didonato@us.gt.com

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NEW YORK STATE TAX REFORM - 2014/2015 May 8, 2014 Grant Thornton LLP. All rights reserved.
NYS TAX REFORM
COMBINED REPORTING
            Prior Law                                   New Legislation

            Article 9-A                               Requirements to be combined:
            • Ownership Standard – 80%                • Unitary Business Test
            • Substantial Intercorporate Transactions • >50% Ownership Test

            Article 32                                  NY Combined group must include:
            • 65% or 80% or more ownership or           • Domestic Corporations
               control and substantial intercorporate   • Alien corporations deemed domestic
               transactions/distortion                    corporations under IRC
            • Mandatory combination for 80% or          • Alien corporations with effectively
               more ownership of New York                 connected income
               taxpayers (no distortion test)
                                                        Commonly-Owned Group Election

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NEW YORK STATE TAX REFORM - 2014/2015 May 8, 2014 Grant Thornton LLP. All rights reserved.
COMBINED REPORTING
 COMMONLY-OWNED
 GROUP ELECTION
  Commonly Owned Group Election – May elect to treat all commonly owned
  corporations as part of one unitary business group (all net income would be subject
  to formula apportionment, regardless of whether that income is from a corporation
  or activities not part of the unitary business in NY). Election is binding for 6 years
  and renewed for 7 years unless revoked. Election must be made on an original timely
  filed return.

  Note – No "unitary" definition is contained within the revised law.

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NEW YORK STATE TAX REFORM - 2014/2015 May 8, 2014 Grant Thornton LLP. All rights reserved.
NYS TAX REFORM
 COMBINED REPORTING (CONT.)
  Prior Law                                                 New Legislation
  Captive REIT – exclusion of captive REIT from •               Included in combined return.
  combined Article 32 tax return if bank has
NYS TAX REFORM
   COMBINED REPORTING FOR
   CAPTIVE INSURANCE COMPANIES
   Prior Law                                           New Legislation
   Overcapitalized Captive Insurance Companies         Combinable Captive Insurance Companies are
   are required to file combined returns, either       required to file combined returns, under Article 9-A
   under Article 32 or 9-A with its closest            with its closest controlling stockholder. Determining
   controlling stockholder                             "closest controlling stockholder" has not changed.
   "Overcapitalized Captive Insurance Company" is      "Combinable Captive Insurance Company" is a
   a company that: (a) >50% of its voting stock is     company that: (a) >50% of its voting stock is
   owned/controlled directly/indirectly by a           owned/controlled        directly/indirectly   by      a
   corporation; (b) licensed as a captive insurance    corporation; (b) licensed as a captive insurance
   company under New York State laws or another        company under New York State laws or another
   jurisdiction; (c) business includes providing,      jurisdiction; (c) business includes providing, directly
   directly and indirectly, insurance or reinsurance   and indirectly, insurance or reinsurance covering the
   covering the risks of its parent and/or members     risks of its parent and/or members of its affiliated
   of its affiliated group; and (d) 50% or less of     group and (d) 50% or less of its gross receipts
   its gross receipts for taxable year consists of     consist of premiums from arrangements that
   premiums                                            constitute insurance for federal income tax
                                                       purposes

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NYS TAX REFORM
   OVERCAPITALIZED NON- LIFE
   INSURANCE COMPANIES
- New Discretionary Provision

- The Commissioner may include in the entire net income of an Article 9-A taxpayer, as
  a deemed distribution, the amount of the net income of an insurance company
  subject to tax under NY Tax Law Sec 1502-a [of which 50% or less of its receipts
  consist of premiums] that is in excess of its net premium income.

- Not applicable to Captive Insurance Company taxable under other sections of Article
  33

- Includes income in NY tax base but not in apportionment factor

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NYS TAX REFORM
   MORE COMBINED REPORTING
   Prior Law                                             New Legislation
   International Banking Facility (IBF)                  - No specific rules for IBF's
                                                         - Apportionment relief for IBF transactions
                                                         obtained through new customer sourcing rules
   Alien Subsidiaries – not allowed to be included in a Alien Subsidiaries may be included in a
   combined Article 32 tax return                       combined return if subsidiary has ECI, is unitary
                                                        and meets >50% ownership test

   Article 9 (Certain Utilities) – Not includable in Not Includable in combined 9-A return
   combined 9-A return
   New York S Corporation - Not includable in Not Includable in combined 9-A return
   combined 9-A return

   Captive RICS – Includable in combined 9-A return      Captive RICS – Includable in combined 9-A
                                                         return
   Noncaptive RICS and Noncaptive REITS – Not
   includable in combined 9-A return                     Noncaptive RICS and Noncaptive REITS – Not
                                                         includable in combined 9-A return

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COMBINED REPORTING
LIMITED PARTNERS
   Corporate Limited Partner – May be Subject to a Separate Filing
   Requirement
   If a corporation is subject to tax under this article solely as a result of its ownership of a limited
   partner interest in a limited partnership that is doing business, employing capital, owning or leasing
   property, maintaining an office in this state, or deriving receipts from activity in this state, and NONE of
   the corporation's related corporations are subject to tax under this article, such corporation shall
   NOT be required or permitted to file a combined report under this section with such related
   corporations.

   CAVEAT: Under the new legislation the NYS Dept. of Taxation has the authority to adopt regulations to
   determine if ALL corporate partners are subject to tax. There is currently NOT an exception for
   corporate LP's with less than 1% and a basis of less than $ 1 million.

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NYS TAX REFORM
   INCOME EXCLUSIONS
            Prior Law                                 New Legislation

            Article 32 - 22 ½ exclusion for treasury & No more exclusion for treasury and
            municipal income                           municipal income – under new rules, may
                                                       benefit from apportionment treatment
            Article 32 - Dividends and Gains from No deductions for interest, dividends or
            subsidiary capital (60% exclusion)    gains from subsidiary capital
            Article 32 - Interest from Subsidiary •       Subsidiary Capital and related
            Capital (17%)                                 exclusions are eliminated.

            Article 9-A - 100% exclusion for income •     See exclusions for "other exempt
            from subsidiary capital                       income", "investment income".

                                                      •   Other exclusions - 50% and 32%
                                                          subtractions for small community
                                                          banks and thrifts.

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NYS TAX REFORM
 INVESTMENT CAPITAL/INCOME
Prior Law                                        New Legislation
Article 32 – Banks did not have concept of       The need to compute an IAP is eliminated.
investment capital/income                        Investment Income still can not exceed Business
                                                 Income

Article 9-A – Income from investment capital is •    Investment income is now a subtraction – Must
included in entire net income, and is apportioned    attribute interest expense and offsetting currency
based on taxapyer's Investment Allocation            or price hedges against investment income. If
Percentage (IAP)                                     the attribution puts investment income into a
                                                     loss, a taxpayer will be required to increase
                                                     business income.
                                                 •   40% election to investment income, allows TP
                                                     to not attribute interest expense.
IAP is a ratio based on New York presence of the •   Investment capital no longer includes bonds and
underlying securities held by the Taxpayer           other securities. NARROWED TO INCLUDE
                                                     STOCKS ONLY.
                                                 •   Sec 78 dividends do not qualify (See, Sec 78
                                                     dividend exclusion NY Tax Law Sec.
                                                     208(9)(a)(6))

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NYS TAX REFORM
INVESTMENT CAPITAL/INCOME
CONTINUED
  Prior Law                                  New Legislation
  No minimum holding period for Investment capital requires a minimum 6 month holding period
  investment income/capital securities and is limited to issuers not unitary with the combined filing
                                       group
  No non-unitary requirement for Stocks in corporations less than 20% directly or indirectly owned
  security to qualify as investment would be presumed to be non-unitary
  capital
  9-A NOL must be applied in No longer required to apply NOL's against investment income
  deduction    year    against    both
  investment and business income.
                                             Qualified Financial Instrument Election – may elect to not treat
                                             certain securities as investment income (Section 475 and 1256)
                                             and use special apportionment rules (8%)
  Required to attribute both interest &      No attribution of noninterest expenses to investment income
  non-interest expenses to investment
  income.                                    Interest expense attribution still remains (40% election allowed)

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NYS TAX REFORM
 INVESTMENT CAPITAL/INCOME
 (CONT.)
 If the election to reduce investment income by 40% (haircut election) is made
 then:
 • Exempt CFC Income and Exempt Unitary Corp. Dividends (from corps
     not included in the combined group) must also be reduced by 40%.
 • Similar 40% elections are available for Exempt CFC Income and Exempt
     Unitary Corp Dividends; and if made – the 40% haircut must also be
     made to investment income.
 • 40% election is NOT available for dividends from corporations subject to
     tax under either Article 9 or Article 33

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NYS TAX REFORM
OTHER EXEMPT INCOME
New Legislation

• Exempt CFC Income- IRC Section 951 Income (including Subpart F) from a
  CFC conducting a unitary business – but not included in the combined report-
  less interest deductions (unless 40% election is made).
• Exempt Unitary Corporation Dividends – Dividends from corps that are unitary
  (e.g., corps with
SUBTRACTION MODIFICATION
FOR THRIFTS OR COMMUNITY
BANKS
(
SUBTRACTION MODIFICATION
FOR THRIFTS OR COMMUNITY
BANKS
(
NYS TAX REFORM
TAX RATES
               Prior Law                          New Legislation

               Tax Rate – 7.1%                    Tax Rate – 7.1%, 6.5% for tax
                                                  years beginning on or after
                                                  1/1/16
               MTA Tax Rate – 17%                 New MTA Rate – 25.6%
                                                  Potential reduction in rate in 2016
               MTA –using rates in effect 97/98   MTA no longer linked to tax in
                                                  effect 97/98
                                                  Minimum Taxable Income Base &
                                                  Tax on Subsidiary Capital
                                                  eliminated

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NYS TAX REFORM
OTHER TAX BASES
      Prior Law                              New Legislation

      • Asset-based tax (Article 32) – • Capital-based tax – based on NET
        based on GROSS assets – tax rate   assets – tax rate .15%
        .01%
                                         • Cap on allocated capital is raised to
      • Tax on Capital (9-A) - $1M cap     $5M

                                             • Capital Base Tax – 6 year phase-out

      • Fixed Dollar Minimum Tax (Article • Fixed Dollar Minimum Tax on New
        32) - $250 per subsidiary           York gross receipts – max. tax for
                                            corporation with receipts > $1B is
      • Fixed Dollar Minimum Tax (9-A) –    $200k (lower for qualified NY
        max. tax $5,000                     manufacturers)

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NYS TAX REFORM
PHASE OUT OF CAPITAL
BASE

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NYS TAX REFORM
FIXED DOLLAR MINIMUM
TAX – REGULAR C-CORPS

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NYS TAX REFORM
FIXED DOLLAR MINIMUM TAX –
QUALIFIED NY MANUFACTURERS
& QUALIFIED EMERGING
TECHNOLOGY COMPANY

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NYS TAX REFORM
NET OPERATING
LOSSES
 Prior Law
 • NOLs – Article 32 NOLs and Article 9-A NOLs can not be applied to different
    tax articles
 • NOLS are pre-apportioned
 • NOLs are limited to federal income
 New Legislation
 • Existing NOLs (9-A or 32) are converted to a "Prior Net Operating Loss
    Conversion Subtraction" and may be carried forward for 20 years
 • 1/10th of the PNOLD may be utilized in each year plus any unused conversion
    subtractions from prior years and the balance carried forward to 2036
 • Election to deduct 50% of the PNOLD in 2015 and 50% in 2016
 • Small Business Corps are not subject to the 1/10th limitation
 • The PNOLD is applied before NOLD
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NYS TAX REFORM
NET OPERATING LOSSES
Prior Year Net Operating Loss Deduction - PNOLD

• Max PNOLD and MAX NOLD – is the amount that reduces tax on business
  income to tax on capital or fixed dollar minimum.
• "Prior Net Operating Loss Conversion Subtraction Pool" =

         (Post-apportioned loss (using 2014 BAP*) X the base year (2014) tax rate)
                            6.5% (or 5.7% for a manufacturer)

*Note – Changes to NYS sourcing rules are applicable to tax years beginning on or after
1/1/15.

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NYS TAX REFORM
 NET OPERATING LOSSES
 • Future NOLD's are post apportioned – no longer limited to federal, and no
   longer subject to rules requiring the NYS NOLD originate in the same year as the
   federal NOLD.
 • Starting in 2015 a 3 year carryback is allowed (i.e., no longer limited to 10k), but
   not to years prior to 2015.
 • NOLD – NOL only utilized to the extent that income / tax is reduced to the
   fixed dollar minimum or tax on capital
 • A MTA Surcharge benefit is achieved by having a PNOLD, instead of the
   previously proposed PNOL Credit.
 • Special Rules for Combined Groups and Changes in Group between the year the
   NOL was generated and the year of the NOLD.
 • SRLY & 382 rules apply.

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NYS TAX REFORM
APPORTIONMENT
           Prior Law                         New Legislation (Effective for tax years beg.
                                             on or after 1/1/15)

           Article 32 – Cost of Performance Business income and capital
           (SINAA) rules for receipts       allocated based on single receipts
                                            factor apportionment formula for
                                            all (Art. 9-A and former Art. 32)
                                            corporations
           Article 9-A – Net Business Income generally                   sourced       to
           income is apportioned based on a customer location
           single sales factor
                                             Qualified Financial Instruments –
                                             8% election

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APPORTIONMENT
   FOR DIGITAL PRODUCTS
   AND SERVICES
  • Digital Product = Any property or services, or combination thereof,
    delivered to a purchaser through the use of wire, cable, fiber-optic,
    laser, microwave, etc. (Includes information services, video games,
    books, storage of digital products and computer software)
  • Generally, receipts from sale of digital products would be sourced
    to NY if the product or service is used in NY
  • "Delivered to" is defined to include furnished, provided to, or
    accessed by

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APPORTIONMENT
   HIERARCHY FOR SOURCING
   DITIGAL PRODUCTS AND SERVICES
  • Sourcing Rule Hierarchy
     1. Customer's location of primary use.
     2. Location were the product was received
     3. Prior Year apportionment fraction for such digital receipts
     4. Use of the apportionment fraction for the current year for
        digital receipts sourced under method 1 and 2.

  • If receipt for digital product is comprised of a combination of
    property and services, it CANNOT be divided – considered one
    receipt – regardless of whether separately stated on invoice

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APPORTIONMENT
   OTHER BUSINESS RECEIPTS
  • Generally, receipts from "other services and other business receipts"
    shall be included in the numerator if the location of the customer is
    within the state
  • Whether receipts are included in the numerator is determined
    according to a hierarchy set forth in the new/proposed law

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APPORTIONMENT
   HIERARCHY FOR SOURCING OTHER
   BUSINESS RECEIPTS
   • Sourcing Rule Hierarchy
      1. Benefit is Received in the state.
      2. Delivery destination
      3. Prior Year apportionment fraction for such receipts
      4. Proxy using apportionment fraction for the current year using
         receipts sourced under method 1 and 2.
   • Taxpayer must exercise due diligence before proceeding to next
     level an base determination on info. known or that would be known
     upon reasonable inquiry
   • Commissioner may adjust or taxpayer my request alternative
     method

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NYS TAX REFORM
   APPORTIONMENT FOR QUALIFIED
   FINANCIAL INSTRUMENTS (QFI)
   •  Qualified Financial Instruments are defined as instruments that are marked to market under
      IRC Sections 475 or 1256, and specifically exclude loans secured by real property
   • General Rule: Income from QFI's is excluded as exempt investment income if held > 6
     months, or included in a taxpayer's business income and apportioned based on customer
     sourcing.
   • QFI 8% election:
       – Under this method, 8% of all net income from QFIs is included in the numerator while
          all net income from QFIs is in the denominator.
       – If Taxpayer makes this election, ALL income from QFIs would be business income and
          NOT excluded as exempt investment income.
       – This election would be irrevocable and must be made on an annual basis on an original
          timely filed return.
       – If Taxpayer does not elect the fixed 8% method, then receipts and net gains are sourced
          through customer based sourcing (i.e., billing address or commercial domicile).

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APPORTIONMENT

   • Corporate debt – include interest in numerator if commercial domicile of issuing
     corporation is in-state. 8% of net gains from sales of corporate bonds sold through
     registered securities broker or dealer or licensed exchange is included in numerator. Net
     gains from other sales is included in numerator, determined by multiplying net gains by a
     fraction (gross proceeds from sales to in-state purchasers/gross proceeds everywhere)

   • Asset-backed securities – 8% of interest income from asset-backed securities (including
     securities issued by government agencies such as GNMA, FNMA, FHLMC) shall be
     included in the numerator. 8% of net gains from sales of these government issued
     securities or other asset backed securities sold through a registered securities broker or
     dealer or licensed exchange will be included in the numerator; net gains from the sales of
     other asset-backed securities will be sourced based on fraction (gross proceeds from sales to
     in-state purchasers / gross proceeds to purchasers everywhere)

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APPORTIONMENT
   (CONTINUED)
  • Loans – Interest on loans secured by real property in NYS are included in the
    numerator of the receipts apportionment factor.
  • Loans –Interest on loans not secured by real property – included in the numerator
    if the borrower is located in NYS. [Note: SINAA is no longer]
  • Intercompany loans between non-combined members – customer sourcing to
     the principal place of business of affiliate.
  • Net gains from the sale of loans secured by real property – use ratio
           gross proceeds of loans secured by real prop in state
           gross proceeds of all loans secured by real property
  • Net gains from sale of loans not secured by real property – use ratio
           gross proceeds of loans not secured by real prop to purchasers in state
            gross proceeds of loans not secured by real prop to all purchasers

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APPORTIONMENT
   FEDERAL, STATE & MUNI DEBT –
   NO LONGER INVESTMENT CAPITAL
  • Federal, state, and muni debt – under new rules, Taxpayer gets benefit
    by including 100% interest & net gains from debt issued by U.S.
    government and New York in the denominator, and 50% interest
    & net gains from debt issued by other jurisdictions
  • None of this income is included in the numerator

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APPORTIONMENT
   (CONTINUED)
 • Reverse repurchase agreements and securities borrowing agreements - Under the
   new rule, 8% of net interest income from reverse repurchase and securities
   borrowing agreements shall be included in the numerator of the apportionment
   factor. Related interest expense is deductible
 • Federal Funds - Under the new rule, 8% of net interest expense from federal shall
   be included in the numerator of the apportionment factor.
 • Other Financial Instruments - Net gains from sales of other financial instruments
   and other income from OFI are customer sourced (Payor's location);
     – provided that if purchaser or payor is a registered securities broker or dealer
        OR the transaction is made through a licensed exchange, then 8% of the net
        gains or other income is included in the numerator

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APPORTIONMENT
   OTHER ISSUES
   • Dividends and net gains from sale of stock or partnership interests
         – are NOT included in numerator or denominator
         – Unless the Commissioner determined it necessary to
         properly reflect the business income or capital
   • Aggregate method is required for inclusion of partner's share of
     flow-through factors

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NYS TAX REFORM:
MANUFACTURERS
•     Qualified New York Manufacturer –
          - Principally engaged in manufacturing , and
          - Either (a) all of the manufacturers real and personal property are in NY, or (b)
              owns property with an adjusted basis of at least 1M,
          - Alternatively, a taxpayer or combined group may still qualify provided:
          - (a) owns New York property used in manufacturing with $100M adjusted basis,
              and (b) at least 2,500 New York manufacturing employees
•     Effective for tax years beg. on or after January 1, 2014, the tax rate on business income
      was reduced to 0%
•     Qualified New York Manufacturer - Property Tax Credit – 20% of real property tax paid.
           − The Art. 9-A tax credit can reduce tax to $25 while the Art 22 credit is
                refundable

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NYS TAX REFORM:
 ECONOMIC NEXUS
   New York State adopts economic nexus standards
  • If deriving receipts of $1M or more based upon the new apportionment
    rules
  • If Taxpayer has issued 1,000 or more credit cards with a mailing address in
    NYS
  • If Taxpayer has merchant customer contracts with 1,000 or more locations
    in NYS
  • If Taxpayer has at least 10 customers or merchant contracts, but is a
    member of a combined return with members meeting the 1,000 test.
  • Corporations with $10k of NYS receipts are aggregated with other
    members of combined group that have $10k of receipts in determining
    $1M threshold.
  • Receipts threshold is linked to CPI

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NYS TAX REFORM:
 OTHER NEXUS PROVISIONS
 • Under prior law, the use of fulfillment services of a person other
   than an affiliated person and the ownership of property stored on
   the premises of such person in conjunction with such services, does
   not create nexus. Under new law, this will create nexus.
 • If a partnership is doing business, employing capital, owning or
   leasing property in NYS, maintaining an office in NYS, or deriving
   receipts from activity in NYS, any corporation that is a partner in
   such partnership shall be subject to tax under this article as
   described in the regulations of the commissioner
 • Prior Law provides an exception for LP interests - 1M Capital or
   1% LP interest

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NYS TAX REFORM:
   OTHER ITEMS - REPEALED
   The NYS legislation repealed:
   • Organization tax; taxes on changes of capital – Section
     180
   • License and maintenance fees on foreign corporations –
     Section 181
   • "Add-on" minimum tax for individual taxpayers
   Not Repealed
   • Stock Transfer Tax – Article 12

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NYS TAX REFORM:
   SELECTED CREDITS &
   INCENTIVES
 • Extended the following NYC programs:
              • NYC Relocation & Employment Assistance Program (REAP)
                and the Lower Manhattan REAP extended to June 30, 2015
                (from June 30, 2013)
              • Lower Manhattan Sales & Use Tax Exemption extended to
                September 1, 2017 (from September 1, 2015) for locations at
                the World Trade Center site, World Financial Center, and
                Battery Park City; and to September 1, 2015 (extended from
                September 13, 2013) for other qualifying locations in Lower
                Manhattan.

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CLOSING THE
   RESIDENT TRUST LOOPHOLE
  Closing the Resident Trust Loophole
      • Distributions of accumulated trust income to New York resident beneficiaries of
         trusts qualifying for the New York resident trust exception will now be taxed
           ― In calculating the taxable addition, the exception for accumulation distributions
                from certain domestic trusts in I.R.C. Section 665(c) shall be disregarded;
           ― The addition will not include:
                    • Income earned by the trust in any tax year in which the trust was already
                        subject to tax in NY;
                    • Income earned by a trust prior to beneficiary becoming a resident of
                        New York or in any taxable year starting before January 1, 2014
      • The legislation eliminates the Resident Trust Loophole that allows incomplete gift,
         non-grantor trusts set up by NY residents to completely avoid NY income tax by
         treating these trusts as grantor trusts for income earned after June 1, 2014

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ESTATE AND GIFT
 TAX REFORM
 Estate Tax Rates:
      – Enacted legislation provides a tax rate hierarchy for decedents dying on or after April
          1, 2014 and before April 1, 2015. It does not include a decrease of the highest estate
          tax rate from 16% to 10% as was originally proposed.
 Estate Tax Exemption:
      – For decedents dying on or after April 1, 2014 and before April 1, 2015, the estate tax
          exclusion is increased from the current $1 Million to $2,062,500.
      – After April 1, 2015, the exclusion amount will gradually increase to tie to the federal
         exclusion amount of $5.34 Million by January 1, 2019.
      – After January 1, 2019, the exclusion amount will be indexed for a cost-of-living
          adjustment.
 Gifts:
      – The Legislation also requires certain gifts made by the decedent during the 3-year
         period prior to death to be added back to the taxable gross estate.
 Generation-skipping tax is repealed.
 Trusts with accumulation distributions to NY residents will be required to file NYS
 returns.
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MCTMT
   SELF-EMPLOYED
   INDIVIDUALS
            Current due dates:               New legislation due
                                             dates:

            April 30                         April 15

            July 31                          June 15

            October 31                       September 15

            January 31                       January 15

            Return Due: April 30th           Return Due: April 15th

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OTHER
   PROVISIONS
   • Allow Taxpayers to use electronic signatures when authorizing their
     tax preparers to e-file their tax returns and related documents
   • Preventing applicants from receiving or renewing professional or
     business licenses if they owe certain past-due tax liabilities

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QUESTIONS

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