New York State Legislature Passes 2015-2016 Budget Bill With Significant Changes From Governor’s Proposal

The New York State Legislature has passed—and Governor Cuomo is expected to sign—a 2015-2016 Budget Bill (the "Budget Bill") that contains significant changes to the New York State and City tax law, including important modifications to the corporate income tax reform legislation that was adopted last year. Of equal significance are provisions the governor had proposed in his Executive Budget, but which were rejected by the Legislature.

What's in the Budget Bill?

1. New York State Corporate Income Tax

   Definition of Investment Capital. The definition of "investment capital" is amended to mean investments in stocks that: (i) meet the definition of a capital asset under section 1221 of the Internal Revenue Code ("IRC") at all times the taxpayer owned the stock during the taxable year; (ii) are held by the taxpayer for investment for more than one year; (iii) would generate or would be treated by the taxpayer as generating long-term capital gains or losses under the IRC if disposed; and (iv) before the close of the day on which the stock was acquired, are clearly identified on the taxpayer's books and records as stock held for investment in accordance with the requirements of IRC section 1236(a)(1) (or by October 15, 2015 for stocks acquired prior to that date and not subject to IRS section 1236(a)(1)). Stock acquired on or after January 1, 2015, must have never been held for sale in the regular course of business in order to qualify as investment capital.

   Clarifications have also been made to the investment capital holding period presumption. The presumption allowed taxpayers to treat stock as meeting the holding period requirement for purposes of qualifying as investment capital if the taxpayer owned the stock on the last day of the taxable year. The Budget Bill amends the presumption to require that the taxpayer own the stock at the time it actually files its original report for the taxable year in which it acquired the stock. This change was presumably made to prevent taxpayers from deferring tax on business income generated by stock purchased and disposed of during the holding period, but prior to the filing of the tax report.

   Cap on Investment Income. The amount of investment income a taxpayer may claim is capped. If a taxpayer's investment income, determined without regard to allowable interest deductions, is more than 8 percent of its entire net income, then investment income determined without regard to the interest deductions must be capped at 8 percent of the taxpayer's entire net income.

   Interest Expense...