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(§ 11-602(8)(f), Administrative Code.)
(a) A deduction similar to that allowed under § 172 of the Internal Revenue Code may be allowable in computing entire net income for the purposes of Subchapter 2 of Chapter 6 of Title 11. For New York City tax purposes, as for Federal tax purposes, except as provided in subdivision (b) of this section, a net operating loss may be carried back to each of the three taxable years preceding the year in which the loss was sustained, and may be carried forward to each of the five following taxable years. The New York City net operating loss deduction is presumably the same as that allowed for Federal tax purposes, subject to three limitations explained hereunder.
(b) One of these limitations is that no deduction is allowable for a loss sustained during any taxable year in which the taxpayer was not subject to tax under Subchapter 2 of Chapter 6 of Title 11.
Example 1: A corporation is incorporated in Pennsylvania in January, 1967. During the taxable year 1967, it sustains an operating loss of $10,000. In January, 1968, it begins to do business in New York City. For the taxable year 1968, it has entire net income of $10,000. No deduction is allowed for any part of the loss sustained in 1967, since the corporation was not subject to New York City General Corporation Tax in 1967.
(c) Another limitation on the New York City net operating loss deduction is that any net operating loss which may be carried back or forward for Federal tax purposes must be adjusted to reflect the additions and subtractions required by 19 RCNY § 11-27 above.
Example 2: For the calendar year 1969, a taxpayer has Federal gross income of $400,000, including $100,000 dividends from nonsubsidiary corporations, and it has deductible operating expenses of $400,000, including $5,000 New York franchise tax and $5,000 New York City General Corporation Tax. Its Federal net operating loss is $85,000 and its New York City net operating loss is $40,000, computed as follows:
Federal | ||
Gross income | $400,000 | |
Less operating expense | $400,000 | |
Taxable income before special deductions | 0 | |
Less special dividends – received deduction | $85,000 | |
Net operating loss | ($85,000) | |
New York City | ||
Federal taxable income (loss) | ($85,000) | |
Add amount of Federal deductions for | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Dividends received | $85,000 | $95,000 |
$10,000 | ||
Subtract | ||
50 percent of dividends received | $50,000 | |
New York City net operating loss | ($40,000) | |
Example 3: If the dividends in example 2 were from subsidiaries, the New York City net operating loss would be $90,000, computed as follows:
Federal taxable income (loss) | ($85,000) | |
Add amount of Federal deductions for | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Dividends received | $85,000 | $95,000 |
$10,000 | ||
Subtract | ||
Dividends from subsidiaries | $100,000 | |
New York City net operating loss | ($90,000) | |
(d) The third limitation on the New York City net operating loss deduction is that in any year it may not exceed the deduction allowable for that year for Federal tax purposes under § 172 of the Internal Revenue Code.
Example 4: If the taxpayer in example 3 in 1966 and 1967 had Federal gross income of $500,000, including $100,000 of dividends from subsidiary corporations and expenses of $350,000 including New York franchise taxes of $5,000 and New York City General Corporation Tax of $5,000, its Federal and City net operating loss deductions will be $65,000 in 1966 and $20,000 in 1967, computed as follows:
Federal
1966 | ||
Gross income | $500,000 | |
Expense | $350,000 | |
$150,000 | ||
Less dividends received | $85,000 | |
$65,000 | ||
Net operating loss deduction (out of total Federal loss for 1969 of $85,000) | $65,000 | |
Taxable income | 0 | |
1967 | ||
Gross income | $500,000 | |
Expenses | $350,000 | |
$150,000 | ||
Less dividends received | $85,000 | |
$65,000 | ||
1969 operating loss carry-back | $85,000 | |
Less amount deducted in 1966 | $65,000 | |
Net operating loss deduction | $20,000 | |
Taxable income | $45,000 | |
New York City
1966 | ||
Federal taxable income | 0 | |
Add | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Deduction for dividends | $85,000 | |
Federal net operating loss deduction | $65,000 | $160,000 |
$160,000 | ||
Less 100 percent of dividends | $100,000 | |
$60,000 | ||
Net operating loss deduction (out of total New York City loss for 1969 of $90,000) | $65,000 | |
Entire net income (loss) | ($5,000) | |
1967 | ||
Federal taxable income | $45,000 | |
Add | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Deduction for dividends | $85,000 | |
Federal net operating loss deductions | $20,000 | $115,000 |
$160,000 | ||
Less 100 percent of dividends | $100,000 | |
$60,000 | ||
Net operating loss deduction (the unused balance of the New York City loss of $90,000 for 1969 – see example 3, supra – would be $25,000, but the New York City deduction may not exceed the Federal deduction | $20,000 | |
Entire net income | $40,000 | |
Since allowance of the net operating loss deduction in 1966 results in a net loss for the carry-back year, the taxpayer will be subject to tax for that year on one of the alternative bases mentioned in 19 RCNY § 11-23, supra. It should be noted that the $5,000 loss shown above may be subtracted in determining the base of the alternative tax measured by entire net income plus compensation paid to officers and stockholders (See: 19 RCNY § 11-34, infra). It may not, however, be carried back or forward to any other year as a net operating loss deduction. Although deductions totaling only $85,000 are allowed for 1966 and 1967 on account of the $95,000 loss sustained in 1969, the $10,000 balance cannot be carried forward to any year subsequent to 1967. Because, for Federal tax purposes, the entire amount of the 1969 loss has been used up in the 1966 and 1967 deductions, no Federal deductions will be allowable in any other year, and the New York City deduction for any year can never exceed the Federal deduction.
Example 5: In 1969 a corporation has a Federal net operating loss of $10,000 and a New York City net operating loss of $8,000. The corporation is allowed a Federal deduction of $10,000 for said loss in 1966. In 1966 its New York City General Corporation Tax was computed on the mill tax basis (see: 19 RCNY § 11-35, infra). There was, thus, no income base for the 1966 City General Corporation Tax against which the 1969 New York City operating loss can be applied. Nor can any New York City deduction on account of this loss be allowed in 1967 or any other year since (a) the Federal deduction on account of the loss was wholly allowed for 1966, (b) it was allowed in no part for any other year, and (c) the New York City deduction can never exceed the Federal deduction.
(e) The fact that a net operating loss is carried back or forward as a deduction in some other year does not prevent its use in computing, for the year in which the loss was sustained, the tax measured by entire net income plus compensation paid to officers and stockholders (see: 19 RCNY § 11-34, infra).
Example 6: In 1969 a corporation paid salaries of $30,000 to its officers and stockholders and sustained a New York City net operating loss of $10,000 for which it is allowed a deduction of the same amount against its entire net income for 1966. Such net operating loss would nevertheless be taken into consideration in computing the third alternative tax for 1969, as follows:
Salaries minus $15,00 | $15,000 |
Net operating loss | $10,000 |
$5,000 | |
30 percent of such balance | $1,500 |
Tax at 5 1/2 percent | $82.50 |
(f) (1) In the case of a corporation which reports for New York City General Corporation Tax purposes on a combined basis with one or more related corporations, either in the year in which a net operating loss is sustained or in the year in which a deduction is claimed on account of such loss, the allowance of such deduction is subject to the same limitations which would apply for purposes of the Federal income tax if such corporation had filed for such year a consolidated Federal income tax return with the same related corporations. These limitations apply to allowance of the New York City net operating loss deduction regardless of whether in fact such corporation, for Federal income tax purposes, filed an individual or a consolidated return.
(2) In general, any carry-back or carry-over from a year in which a combined report was filed (for New York City General Corporation Tax purposes) must be based upon the combined net operating loss of the group of corporations filing such report. The portion of such combined loss attributable to any member of the group which files a separate report for a preceding or succeeding taxable year will be an amount bearing the same relation to the combined loss as the net operating loss of such corporation bears to the total net operating losses of all members of the group having such losses, to the extent that they were taken into account in computing the combined net operating loss.
Example 7: In 1966, X Corp. filed a separate New York City General Corporation Tax report showing entire net income of $20,000 and also filed a separate Federal income tax return showing Federal taxable income of the same amount. In 1969, it filed a separate Federal return showing a net operating loss of $10,000 but joined with Y Corp. and Z Corp. in filing a combined New York City General Corporation Tax report showing the following:
X Corp. – net operating loss | ($10,000) |
Y Corp. – net operating loss | ($20,000) |
Z Corp. – entire net income | $15,000 |
Combined net operating loss | ($15,000) |
For New York City General Corporation Tax purposes, the deduction allowable to X Corp. against its 1966 income must be based upon the combined net operating loss shown above, and the portion of the combined loss attributable to X Corp. is one-third thereof or $5,000. This is because the net operating loss of X Corp. was one-third of the total net operating losses of all members of the combined group having such losses (X Corp., $10,000 and Y Corp., $20,000).
(§ 11-602(8)(e), Administrative Code.) The entire net income of any bridge commission created by the act of Congress to construct a bridge across an international boundary is its gross income less the expense of maintaining and operating its properties, the annual interest on its bonds and other obligations, and the annual charge for the retirement of such bonds or obligations at maturity.
(§ 11-602(8)(d), Administrative Code.) In general, the method of accounting used in computing taxable income for Federal income tax purposes is used in computing entire net income. However, whenever the Commissioner of Finance deems it necessary in order properly to reflect entire net income of the taxpayer, he may determine the year or period in which any item of income or deduction shall be included, without regard to the method of accounting used by the taxpayer.
Example: A taxpayer has a building, installation or construction contract covering a period in excess of one year. The taxpayer keeps his books so as to reflect the total income derived from the contract in the taxable year in which the contract is finally completed, and reports its Federal taxable income accordingly. The Commissioner of Finance may require that income from the contract be apportioned over the entire contract period, on the basis of percentage of completion in each year, or some other appropriate basis.
(a) If the entire net income required to be reported under Subchapter 2 of Chapter 6 of Title 11 is for a period other than the period covered by the taxpayer's Federal income tax return, its Federal taxable income is first adjusted in the manner set forth in 19 RCNY § 11-27, then divided by the number of calendar months or major parts thereof covered by the Federal income tax return, and the result multiplied by the number of calendar months or major parts thereof covered by the report under Subchapter 2 of Chapter 6 of Title 11.
Example: A corporation was organized in 1959 under the laws of a State other than New York, in which other state it carried on its business until March 1, 1966, when it began to do business in New York City. It filed its return for Federal income tax purposes for the calendar year 1966, wherein its taxable income required to be reported was $70,000. In computing its entire net income for the period from March 1, 1966 to December 31, 1966, its Federal taxable income for the calendar year 1966 ($70,000) is first adjusted to conform to entire net income as defined in Subchapter 2 of Chapter 6 of Title 11, and then divided by 12 and the result multiplied by 10.
(b) The method of computing entire net income set forth in the above example is, under similar circumstances, also applicable to corporations reporting on a fiscal year basis for Federal income tax purposes.
(c) However, if in the opinion of the Commissioner of Finance this method does not properly reflect the taxpayer's net income for franchise tax purposes during the period covered by its report, the Commissioner may determine entire net income solely on the basis of the taxpayer's income during such period.
In the case of combined reports, all intercompany dividends are eliminated in computing combined entire net income. As to when combined reports will be permitted or required, see 19 RCNY § 11-91, infra.
For adjustments of income and deductions to correct distortions, see 19 RCNY § 11-25, supra.
(§ 11-604(1), Administrative Code.)
(a) An alternative basis for measuring the primary tax is entire net income plus certain compensation with various adjustments, or the portion of such sum allocable to New York City, if such calculation results in a higher amount than that computed on any of the other three alternative bases. The rate of the tax measured by income plus compensation is five and one-half percent for taxable years beginning before January 1, 1971, six and seven-tenths percent for taxable years beginning on or after January 1, 1971 and ending on or before December 31, 1974, ten and five one-hundredths percent for taxable years beginning on or after January 1, 1975 and before January 1, 1977, nine and one half percent for taxable years beginning on or after January 1, 1977 and before January 1, 1978, nine percent for taxable years beginning on or after January 1, 1978 and before January 1, 1987, and eight and eighty-five one-hundredths percent for taxable years beginning after December 31, 1986. The applicable rates for taxable years beginning in 1974 and ending in 1975 shall be those set forth in Administrative Code § 11-604(1)(C).
(b) The measure of the tax is computed as follows:
(1) Add to the amount of entire net income or net loss (treated as a negative figure) (see example 4) for the year, if any,
(i) all salaries and other compensation paid to every stockholder owning in excess of five percent of its issued capital stock, but only if and to the extent that a deduction was allowed for such salaries and compensation in computing entire net income (or net loss); and
(ii) to the extent not required by subparagraph (i),
(A) for taxable years beginning before July 1, 1996, all salaries and other compensation paid to the taxpayer's elected or appointed officers, but only if and to the extent that a deduction was allowed for such salaries and compensation in computing entire net income (or net loss);
(B) for taxable years beginning on or after July 1, 1996 but before July 1, 1998, 75 percent of the total amount of salaries and other compensation paid to the taxpayer's elected or appointed officers for which a deduction was allowed in computing entire net income (or net loss);
(C) for taxable years beginning on or after July 1, 1998 but before July 1, 1999, 50 percent of the total amount of salaries and other compensation paid to the taxpayer's elected or appointed officers for which a deduction was allowed in computing entire net income (or net loss); and
(D) for taxable years beginning on or after July 1, 1999, no part of salaries and other compensation paid to the taxpayer's elected or appointed officers.
(iii) Notwithstanding anything to the contrary in subparagraph (ii) of this paragraph (1), the full amount of salaries or other compensation paid to any elected or appointed officer for which a deduction was allowed in computing entire net income (or net loss) shall be added to that amount if such officer was, at any time during the taxable year, a stockholder owning more than five percent of the taxpayer's issued capital stock.
(2) Deduct from such total
(i) for taxable years beginning before July 1, 1997, § 15,000,
(ii) for taxable years beginning on or after July 1, 1997 but before July 1, 1998, $30,000,
(iii) for taxable years beginning on or after July 1, 1998, $40,000, (or a proportionate part of the applicable amount in the case of a return for less than a year.)
(3) Multiple the balance by 30 percent.
(c) An elected or appointed officer includes the chairman, president, vice-president, secretary, assistant secretary, treasurer, assistant treasurer, comptroller, and also any other officer, irrespective of his title, who is charged with and performs any of the regular functions of any such officer. A director is not an elected or appointed officer unless he performs duties ordinarily performed by an officer. However, there must be included all compensation received by an officer from the corporation in any capacity, including director's fees.
(d) A stockholder owning in excess of five percentum of its issued capital stock is a person or corporation who is the beneficial owner of more than five percent of the capital stock of the taxpayer, issued and outstanding. Rules for determining the beneficial ownership of stock are set forth in § 11-46(a), "subsidiary," infra.
(e) The provision for measuring the tax on the basis of entire net income plus compensation is designed to prevent tax avoidance by the distribution of profits in the form of excessive salaries. However, measurement of the tax on such basis does not affect the power of the Commissioner of Finance to disallow deductions claimed for unreasonable salaries in computing entire net income.
(f) The provisions of subdivision (b) of this section are illustrated by the following examples:
Example 1: HCO Corporation is a calendar year taxpayer with three shareholders, B, C and D. B owns 4% and C and D each own 48% of HCO's stock. HCO has two subsidiaries. For calendar year 1999, HCO's gross income, other than income from its subsidiaries is $2,000,000. HCO has no investment income or capital. HCO's business allocation percentage is 100%. B is an officer of HCO; C and D are employees but not officers. HCO pays B a salary of $250,000 and C and D each a salary of $500,000. All of B's salary is attributable to subsidiary capital. No portion of C's or D's salary is attributable to subsidiary or investment capital or income. HCO has other deductions of $700,000, of which HCO attributes $100,000 to subsidiary capital and $600,000 to business capital. HCO's federal taxable income is $50,000. After adding back deductions attributable to subsidiary capital, HCO's entire net income is $400,000. The tax on the entire net income base would be $35,400 (8.85% × $400,000). HCO is not subject to tax on the capital base. HCO's alternative tax base is determined as follows:
Entire net income | $400,000 |
plus | |
C and D's salaries | $1,000,000 |
less | |
fixed dollar amount | ($40,000 |
$1,360,000 | |
multiplied by 30% | × .30 |
$408,000 | |
B's salary is not added back because no deduction was allowed for it in determining entire net income. The tax on the alternative basis would be $36,108 ($408,000 × 8.85%). Therefore, HCO pays tax on the alternative tax basis.
Example 2: The facts are the same as in example 1 except that only 60% of B's salary is attributable to subsidiary capital and, therefore, $150,000 of B's salary is disallowed as an expense attributable to subsidiary capital. After adding back that portion of B's salary attributable to subsidiary capital, HCO's entire net income is $300,000. For calendar year 1999, only 50% of that portion of B's salary deductible in determining HCO's entire net income is added back in calculating the alternative tax base. HCO's alternative tax base is determined as follows:
Entire net income | $300,000 |
plus | |
C&D's salaries | $1,000,000 |
plus 50% of B's deductible salary | $50,000 |
less | |
Fixed dollar amount | ($40,000) |
$1,310,000 | |
Multiplied by 30% | × .30 |
$393,000 | |
The tax on the alternative base would be $34,781 which is more than the tax calculated on the entire net income base ($26,550). Therefore, HCO would pay tax on the alternative base.
Example 3: The facts are the same as in Example 1 but D is an officer but not a shareholder of HCO and the taxable year is calendar year 2000. No part of B's or D's salary is added back for years beginning after June 30, 1999. HCO's alternative tax base is determined as follows:
Entire net income | $400,000 |
plus | |
C's salary | $500,000 |
less | |
fixed dollar amount | ($40,000) |
$860,000 | |
multiplied by 30% | × .30 |
$258,000 | |
The tax on the alternative base would be $22,833 ($258,000 × 8.85%). Because that amount is less than the tax measured by entire net income, $35,400, HCO would pay tax on the entire net income basis.
Example 4: ABC Corporation is a calendar year taxpayer. For calendar year 2000, ABC's gross income is $1,000,000 all of which is business income. ABC's business allocation percentage is 100%. ABC pays a salary of $700,000 to A, its vice president for finance. A also owns 6% of the stock of ABC. ABC has $400,000 of other deductions. ABC has a net loss for the year of ($100,000). ABC is not liable for tax on the capital base. ABC's alternative tax base is calculated as follows:
Net loss | ($100,000) |
plus | |
A's salary | $700,000 |
less | |
fixed dollar amount | ($40,000) |
$560,000 | |
multiplied by 30% | × .30 |
$168,000 | |
Because A owns more than 5% of ABC's stock, all of A's salary is added back in calculating the alternative tax base. The tax calculated on the alternative base is $14,868, which is higher than the tax on the ENI base, $0. Therefore, ABC pays tax on the alternative base.
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