On Sept. 25, the New York City Department of Finance issued both Finance Memorandum 18-7 and Finance Memorandum 18-8 to provide detailed filing instructions on reporting I.R.C. § 965 income for purposes of all of the City’s tax regimes. As Bloomberg Tax has discussed recently, this guidance comes as many states pushed out similar instructions.
Filing Instructions for Business Corporation Taxpayers
Finance Memorandum 18-7 requires taxpayers under the Business Corporation Tax with federally reportable I.R.C. § 965 amounts to prepare their 2017 New York City tax return using federal taxable income (FTI) with the inclusion of all I.R.C. § 965 amounts, which the IRS calls the “with calculation.” Taxpayers reporting I.R.C. § 965 income amounts must use the instructions outlined in the memorandum when completing their 2017 Business Corporation Tax returns.
Guidance for the General Corporation Tax, Banking Corporation Tax, or the Unincorporated Business Tax
As previously stated in Finance Memorandum 18-4 from April 20 and reiterated in Finance Memorandum 18-8, taxpayers subject to the General Corporation Tax, Banking Corporation Tax, or the Unincorporated Business Tax are required to classify, as applicable, the I.R.C. § 965(a) income amount, the I.R.C. § 965(c) deduction amount, and any other deductions attributable to that income, as either business income, investment income, or subsidiary capital income. The I.R.C. § 965 net income amount must then be allocated or excluded in accordance with its income classification under existing New York City law.
The guidance also addresses issues with respect to I.R.C. § 965(m) (elections by REITs) and § 965(n) (election not to apply NOL deductions) as they apply to taxpayers under the General Corporation Tax or Unincorporated Business Tax.
New York City Consolidated Group Reporting Requirements for I.R.C. § 965
Finance Memorandum 18-7 notes that federal consolidated group filers are required to compute a pro-forma IRS Transition Tax Statement to demonstrate I.R.C. § 965 amounts computed on a separate basis if the taxpayer files separately in New York City. Additionally, the designated agent of combined group filers must compute a pro-forma IRS Transition Tax Statement demonstrating I.R.C. § 965 amounts as if the combined group had filed a consolidated federal return if the combined group differs from the agent’s federal consolidated group.
I.R.C. § 965 Inclusion Amount as Exempt CFC Income
For purposes of the Business Corporation Tax, New York City classifies I.R.C. § 965(a) amounts as exempt CFC income and requires that taxpayers either add back to federal taxable income interest deductions directly or indirectly attributable to the I.R.C. §965(a) inclusion amount, including any I.R.C. § 965(c) deduction taken at the federal level, or make the 40 percent safe harbor election as specified in New York City Finance Memorandum 16-2.
The guidance clarifies that exempt CFC income is excluded from the receipts fraction for purposes of computing the business allocation percentage, including I.R.C. § 965 amounts attributable to business capital.
Installment Payments Under I.R.C. § 965(h)
To reiterate guidance issued earlier this year in Finance Memorandum 18-4, New York City does not conform to the tax payment installment provision under I.R.C. § 965(h). The tax is required to be paid in full when due for the 2017 tax year and may not be deferred.
Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Are there any other states or jurisdictions that need to issue guidance on I.R.C. § 965 income?
For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.
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