New York Investment Tax Credit Not Open to Passthrough Owners

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

Shareholders of a Rochester, N.Y., printer operating as an S corporation won’t be eligible for investment tax credits if the company expenses property rather than claiming depreciation.

Donna Gardiner, an administrative law judge of the state’s Division of Tax Appeals, ruled in a June 1 determination letter that a state auditor accurately denied claims for the tax credit by TLF Graphics Inc.'s owners, via the passthrough entity, on their New York state resident income tax return forms ( In the matter of the petition of LeBlanc , DTA Nos. 826547, 826548, 826549, determination letter 6/1/17 ).

A passthrough entity is one in which income tax liability passes through to its owners, rather than stopping with the company.

The shareholders claimed the investment tax credit for the 2010 and 2012 tax years for the depreciation of facilities in Monroe County, N.Y., though the company had already counted the property as expenses on federal tax forms.

Reduce Cost Basis

The auditor reviewed the returns and noted that petitioners didn’t reduce the cost basis of the investment-tax-credit property by the amount of the property expensed under Section 179(a) of the Internal Revenue Code, the determination letter said. The auditor concluded this was in error and an adjustment was made to the cost basis, which in turn resulted in an adjustment to the tax credit claimed.

The shareholders said the state statute allows for the differing treatment, even though directions on state forms doesn’t.

Statutory language on the issue is clear, the judge said. It specifically provides for a credit for property which is depreciable.

While the TLF Graphics facilities were depreciable, TLF instead chose to expense them. IRS Publication 551 states: “If you take the section 179 deduction for all or part of the cost of the qualifying business property, decrease the basis of the property by the deduction.”

For federal purposes, TLF had completely recovered the cost incurred in its purchase of the property, “leaving a zero basis upon which to compute the desired state investment tax credit,” Gardiner ruled, denying the petitions of Ronald N. and Karen A. LeBlanc, Robert P. and Patricia Z. McJury, and Daniel J. and Carolyn Wagner.

To contact the reporter on this story: Che Odom in Washington at COdom@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State