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(§ 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.
(§ 11-604(1), Administrative Code.)
An alternative basis for measuring the primary tax is total business and investment capital, or the portion thereof allocated 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 tax is one mill (or one-fourth of a mill in the case of a cooperative housing corporation or a housing company organized and operating pursuant to the provisions of Article 2 or 4 of the Private Housing Finance Law) on each dollar of total or allocated business and investment capital.
(§ 11-602(b), Administrative Code.)
(a) The term "business capital" means the total average fair market value of all the taxpayer's assets (whether or not shown on its balance sheet), exclusive of stock issued by the taxpayer or assets constituting subsidiary capital (19 RCNY § 11-46, "subsidiary capital," infra) or investment capital (19 RCNY § 11-36, "investment capital," supra), less current liabilities (other than loans or advances outstanding for more than a year) payable by their terms on demand or not more than one year from the date incurred, to the extent such liabilities are not deducted in computing subsidiary capital or investment capital.
(b) Liabilities so deductible include notes, accounts payable, wages payable, accrued taxes, expenses and interest. Notes and other written obligations payable by their terms on demand or not more than one year from their date, which are regularly renewed from year to year, are not deductible in computing business capital. Loans or advances outstanding for more than a year as of any date during the year covered by the report, are not deductible in computing business capital. Where a taxpayer owns property subject to a debt, lien or encumbrance or other obligation, the fair market value of the property, not merely the taxpayer's equity therein, shall be used in computing the average fair market value of the property in valuing business capital, whether or not the taxpayer has any personal liability under any obligation to which the property is held subject.
(c) The term "business capital" includes loans to a subsidiary, the interest on which is claimed by and allowed to the subsidiary as a deduction for purposes of any tax imposed by Title 11, Chapter 6, Subchapter 2 or Subchapter 3 of the Administrative Code, provided such loans do not constitute investment capital pursuant to 19 RCNY § 11-37.
(d) (1) If in a taxable year a taxpayer has business capital but no investment capital, cash in hand and cash on deposit (as defined in 19 RCNY § 11-37(a)(3)) must be treated on all reports for the taxable year as business capital.
(2) If in a taxable year a taxpayer has both business and investment capital, the taxpayer may elect to treat cash on hand and cash on deposit (as defined in 19 RCNY § 11-37(a)(3)) as business capital. A taxpayer may not elect to treat part of its cash as business capital and part as investment capital. No election to treat cash as business capital may be made if the taxpayer has no business capital exclusive of cash. Any taxpayer who may elect under this paragraph (2) will be presumed to have made an irrevocable election to treat cash as business capital for that taxable year unless such taxpayer properly elects under 19 RCNY § 11-37(a)(2)(ii) to treat cash on hand and on deposit as investment capital.
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