To Clients and Friends:
As we are sure you are aware, New York is one of several states that are looking at ways to mitigate the effects of the limitation on deducting state and local taxes (“SALT”) imposed by the new Federal tax law. Specifically, the Federal tax now places a cap of $10,000 on the combined amount of state and local income taxes, real estate taxes, property taxes, etc. that individuals can deduct each year.
New York has come up with a plan that may help to partially offset the impact of the loss of that deduction on its resident and nonresident taxpayers. Under a new optional system, called the Employer Compensation Expense Program, a New York employer can elect to pay a payroll tax on wages of employees making more than $40,000 during the year: those employees get a dollar-for-dollar credit against their State income tax for that year, and the employer gets a business tax deduction against its Federal and State (and City, if applicable) business taxable income. Employees can accelerate the credit they receive by adjusting withholdings accordingly.
The tax is being phased in over three years: The initial tax rate is 1.5% for 2019, increasing to 3.0% for 2020 and to 5.0% for 2021 and later years.
The election to participate must be made by December 1, 2018 for the 2019 tax year, subject to re-election each subsequent years.
This will clearly be beneficial for some New York employers, but not necessarily for all. And hopefully the Federal government will accept this treatment for Federal tax purposes. Another recent State proposal, involving charitable contributions in lieu of taxes – also designed to get around the SALT deduction limitation – is currently being reviewed by IRS to determine if it will be accepted for Federal income tax purposes.
More details can be found at https://www.tax.ny.gov/pdf/memos/ecep/m18-1ecep.pdf.
If you would like to learn more about this New York State system, especially how it may apply to you and your company, please feel free to call us.