Tax Benefits of Start Up NY

By: Steve Masur

A New York business that has partnered with a college or university sponsoring the tax-free area in which the company seeks to locate and do business, and demonstrates that it will create new net jobs in its first year of operations may participate in the START-UP NY program and, in doing so, operate tax-free for ten years.[1] Pass through entities do qualify for the tax benefits; in order to qualify for the program, the business must either be organized as a sole proprietorship, partnership, corporation, or limited liability company.[2]

START-UP NY eliminates tax liability for “any business or owner of a business in the case of a business taxed as a sole proprietorship, partnership or New York S corporation, that is located in the tax-free NY area,”[3] for ten years by providing tax credits for the following:

• Business Tax-Free New York Area Elimination Credit: This credit eliminates franchise tax and personal income tax calculated by the business when filing its tax return. The credit equals the business’ “tax-free area allocation factor” multiplied by its “tax factor.”[4] The tax-free area allocation factor is the business’ economic operational presence (assets and payroll) in the tax-free area.[5] For businesses with operations both inside and outside of a tax-free area, the credit would be prorated based on the percentage of assets and payroll within a tax-free area(s).”[6] For owners of pass-through entities (i.e., sole proprietors, partners, S-corporation shareholders, and LLC members), the taxpayer’s tax factor is the portion that individual’s income attributable to the income of the business in the tax-free area.[7]
• Excise Tax on Telecommunication Services: This credit is equal to the amount in excise tax paid by the business on telecommunication services for services rendered within the tax-free area.[8]
• Metropolitan Commuter Transportation District (MCTD) Mobility Tax: The business is exempt from this payroll expense.[9] The District includes New York City[10] and Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester counties.[11]
• Sales and Use Tax: This refund is for sales and use taxes paid for the retail sale of goods and services used or consumed by the business’ operations in the tax-free area.[12]
• Real Estate Transfer Taxes: “Leases of real property in a tax-free area to an approved business are exempt from the New York state real estate transfer tax. This exemption also applies to any local real estate or real property transfer tax imposed locally.”[13]
• Personal Income Tax Exemptions for Employees: Employees of START-UP NY businesses who were hired in a certified net new job[14] in a tax-free area are exempted from paying New York State personal income tax and, if applicable, New York City personal income tax or, Yonkers personal income tax surcharge or nonresident earnings taxes.[15] The employees only receive the wage exclusion tax benefit during the period that the business remains eligible for the START-UP NY tax exemptions (that being, at most, ten consecutive years).[16] The employer must withhold New York income taxes from the wages paid to eligible employees unless they provide the employer with a certificate of exemption from such withholdings.[17] There is a cap on the number of employees that qualify per business, as well as a statewide cap on the number of net new jobs.[18]

[1] N.Y. Econ. Dev. Law §§ 433–434 (McKinney’s 2015); see also STARTUPNY, http://startup.ny.gov/business-growth (last accessed Aug. 5, 2015).

[2] N.Y. Econ. Dev. Law § 433(1)(d).

[3] N.Y. Tax Law § 39(a)(1) (McKinney’s 2015).

[4] Id. § 40(b).

[5] Id. § 40(c).

[6] STARTUPNY, supra note 1.

[7] N.Y. Tax Law § 40(d)(2).

[8] Id. § 39(c-1); STARTUPNY, supra note 1.

[9] N.Y. Tax Law § 39(d); STARTUPNY, supra note 1.

[10] I.e., New York, Bronx, Kings, Queens, and Richmond counties.

[11] N.Y. Dep’t. of Tax and Fin, Guide to the Metropolitan Commuter Transportation Mobility Tax 5 (2012), available at http://www.tax.ny.gov/pdf/publications/mctmt/pub420.pdf.

[12] N.Y. Tax Law § 39(f); STARTUPNY, supra note 1.

[13] N.Y. Tax Law § 39(g). See also STARTUPNY, supra note 1.

[14] A “net new job” is defined by statute as a job that: “(a) is new to the state; (b) has not been transferred from employment with another business located in this state, through an acquisition, merger, consolidation or other reorganization of businesses or the acquisition of assets of another business, or except as provided in [N.Y. Econ. Dev. Law § 431(6)(d)] has not been transferred from employment with a related person in this state; (c) is not filled by an individual employed within the state within the immediately preceding sixty months by a related person; (d) is either a full-time wage-paying job or equivalent to a full-time wage-paying job requiring at least thirty-five hours per week; and (e) is filled for more than six months.” N.Y. Econ. Dev. Law § 431(5).

[15] N.Y. Tax Law § 39(e); STARTUPNY, supra note 1; START-UP NY Employee Information, N.Y. Dep’t. of Tax and Fin., http://www.tax.ny.gov/pit/sny/employee_information.htm (last accessed July 30, 2015).

[16] START-UP NY Employee Information, supra note 14. “Employees hired for and whose jobs are certified as net new jobs in a tax-free area will pay no state or local income taxes for the first five years. For the second five years, employees will pay no taxes on income up to $200,000 for individuals, $250,000 for a head of household and $300,000 for taxpayers filing a joint return.” STARTUPNY, supra note 1 (emphasis added).

[17] START-UP NY Employer Information, N.Y. Dep’t. of Tax and Fin., http://www.tax.ny.gov/pit/sny/employer_information.htm (last accessed July 30, 2015).

[18] Id. “There is a maximum of 10,000 tax-free jobs after year one, 20,000 tax-free jobs after year two, etc.” Id.