The New York City Department of Finance recently announced the availability of penalty abatements for certain taxpayers that have underpaid business taxes due to the inclusion of Section 965 income.
NYC Finance Memorandum No. 18-4 (PDF) describes tax considerations and late payment penalty relief for NYC taxpayers affected by Section 965 and subject to the General Corporation Tax (GCT), the Banking Corporation Tax (BTX), and the Unincorporated Business Tax (UBT).
Like many states and localities, New York City does not provide for the deferred payment of NYC tax attributable to net Section 965 income. Therefore, S corporations and unincorporated businesses taxed under the GCT, BTX and UBT may see substantial increases in their NYC tax liability. Memorandum No. 18-4 indicates that penalty abatements are available to certain taxpayers that receive bills from the NYC Department of Finance that include an underpayment penalty attributed to net Section 965 income.
Section 965 Background
NYC Finance Memorandum No. 18-4 addresses changes caused by Federal Public Law 115-97, known as the Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017. The TCJA introduced a new Internal Revenue Code provision, Section 965, which imposes a one-time transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.
The TCJA allows certain taxpayers to make an election under Section 965(h) to pay the transition tax in installments over an eight-year period. This election does not, however, defer recognition of Section 965 income, which must be included on a taxpayer’s federal return for the last taxable year beginning before January 1, 2018.
New York State Notice on Section 965 Income
Many states and localities do not provide for the deferral of Section 965 income or repayment. In April, the New York State Department of Taxation and Finance issued Notice N-18-4 (PDF) indicating that in the case of S corporation shareholders, individual taxpayers are required to pay the additional New York tax generated by Section 965 income in the tax year it is recognized and included in federal adjusted gross income. Rhode Island and several other states have issued similar guidance.
“Transition tax—enough about how it works; here is what doesn’t work” (April 9, 2018)