The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.  The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions.  The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the second in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s tax base and income classifications.

Although the modifications are described as “corrections” to last year’s corporate tax reform provisions, the Budget Bill makes a number of substantive changes with respect to the income classification rules.

Investment Capital 

Last year’s corporate tax reform narrowed the definition of investment capital to mean investments in stocks held by a taxpayer for more than six consecutive months but not held for sale to customers in the regular course of business, and excluding stock that is a “qualified financial instrument” for which the taxpayer has elected to use the 8 percent apportionment sourcing rule, stock in a unitary business, stock in a business that is included in a combined report with the taxpayer, and stock issued by the taxpayer.

This year’s Budget Bill further narrows the definition of investment capital by extending the holding period from six months to one year, by tying the definition of investment capital to certain Internal Revenue Code provisions, and by requiring taxpayers to separately identify stock held as investment capital in their books and records.  Investment capital now means investments in stocks that meet the following criteria:

  • Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code at all times the taxpayer owned the stock during the taxable year;
  • Are held for investment for more than one year;
  • The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the Internal Revenue Code;
  • For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
  • Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under section 1236(a)(1) of the Internal Revenue Code for the stock of a dealer in securities to be eligible for capital gain treatment (for [...]

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