Stephani ORourk | Valiant Workforce Management Solutions

New York Legislative Changes: Personal Income Tax Changes and Income Tax Credits

On February 13, 2012, New York State issued TSB-M-12(3)I, summarizing the personal income tax changes enacted on December 9, 2011. The following is a summary of the significant changes:

Individual Income Tax Rates
The individual income tax rates are reduced for 2012 through 2014 and the highest rate (“millionaires surcharge”) has been adjusted from 8.97 percent to 8.82 percent. Click here for a summary of the tax rates in effect for the 2012 through 2014 tax years, as well as the new income tax brackets created as a result of the legislation.

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Changes in Capitalization of Expenditures for Tangible Property Create Opportunities for Property Owners

The Internal Revenue Service and the Treasury Department published temporary regulations in the Federal Register that provide guidance to taxpayers on the treatment of amounts paid to acquire, produce, or improve tangible property regarding the accounting for, and dispositions of, property subject to depreciation.
As a result of these temporary regulations, a taxpayer is not required to simultaneously capitalize and depreciate amounts paid for both the removed and replaced components of a building. A new provision under Internal Revenue Code Section168 expands the definition of dispositions to include the retirement of a structural component of a building.
This change allows a taxpayer to recognize a loss on the disposition of a structural component of a building before the disposition of the entire building so that a taxpayer will not have to continue to depreciate amounts allocable to structural components that are no longer in service.
As a result, property owners have two new opportunities to conduct studies, detailed below, that could lead to significant savings:

1. Building Component Study—Documenting the original cost of building components or building systems which are subsequently replaced (i.e. a roof or HVAC system). For example, a landlord replaces the entire roof on a building it has owned for 10 years at a cost of $300,000. Under the new regulations the landlord must capitalize the cost of the new roof. The landlord performs a Building Component Study and determines that the old roof had a cost of $200,000. Under the new regulations, the landlord can write off the undepreciated basis of the old roof (approximately $150,000, using a 39-year tax life) in the year the new roof is installed. At a 40 percent tax rate, this generates $60,000 in tax savings.

2. Lease Abandonment Study—Documenting the tenant fit-out costs that are removed by a landlord to make way for a new tenant. For example, a landlord purchased an existing, fully tenanted building five years ago. In the current year, a tenant vacates and the landlord removes the former tenant’s finishes (walls, electrical wiring, plumbing lines, ceiling tiles, etc.) to make way for a new tenant. The landlord performs a Lease Abandonment Study and determines the tenant finishes cost $100,000. Under the new regulations, the landlord can write off the undepreciated basis of the tenant finishes (approximately $85,000, using a 39-year tax life) in the year the finishes are removed. At a 40 percent tax rate, this generates $34,000 in tax savings.

If you anticipate replacing a structural component of your building or retrofitting a tenant’s space, under the tax law changes, these studies can lead to significant savings.

Prepaid Discount Vouchers: Unclaimed Property Considerations

Many business owners and finance personnel in the hospitality industry may be exposed to significant unclaimed property liabilities prompted by recent technological, entrepreneurial, and marketing innovations.

Today there are a number of companies, including Groupon and Living Social, which offer “daily deal” promotions whereby a variety of products and services are sold at a significant discount. Under these arrangements, consumers are able to buy vouchers or coupons that can later be redeemed for goods and/or services. But if these vouchers or coupons are not redeemed prior to the expiration of a pre-determined dormancy period, the merchant selling the voucher or coupon may be exposed to liabilities far in excess of the amount they received from the sale of the unused vouchers under so-called “escheat” laws.  For example, a consumer might pay $50 for a voucher to purchase $100 worth of food at a restaurant. The $50 charge for the prepaid voucher would generally be split between the restaurant and the deal site selling the voucher, with each receiving $25.

To the extent this voucher is not used prior to the expiration of the dormancy period, the restaurant may be required to pay to the state the entire $50 face value of the voucher or, $100 if such state deems the voucher a $100 gift certificate. Given that the vendor only received $25, the restaurant would have to come up with the difference for every unredeemed voucher. Needless to say, the potential exposure for unsuspecting merchants can be substantial as online deal sites continue to grow.   Often, state unclaimed property examinations target large businesses or specific industries, such as hospitality, retail, healthcare, insurance, and financial services. The growth of these daily deals could, however, drastically change that landscape.

As with many evolving areas, there are many unresolved unclaimed property issues that merchants must consider if they intend on selling through “daily deal” sites, including whether prepaid vouchers should be treated as gift certificates for unclaimed property purposes, if a separate legal entity structure should be created to sell the vouchers or coupons, the value to be escheated if the property becomes “dormant,” and who is ultimately deemed to be the holder of the property for purposes of the unclaimed property liability.   As state unclaimed property laws continue to evolve in the face of rapid technological innovations and expanding state budget deficits, businesses must be aware of these and other potential issues that may arise and thereby create significant unintended legal and financial obligations. Given the complexity and ever-changing landscape regarding unclaimed property matters, we often recommend that our clients work with either an unclaimed property firm or law firm to assist in addressing these and other potential issues that should be considered.

For more information on the potential unclaimed property implications of prepaid discount vouchers, please email Gary Levy, CPA, partner and director of J.H. Cohn’s Hospitality Industry Practice, or call 646-254-7403; Corey L. Rosenthal, JD, a J.H. Cohn director and member of the Firm’s State and Local Tax Practice, or call 646-625-5729; Patrick J. Duffany, CPA, JD, partner and director of the Firm’s State and Local Tax Practice, or call 860-368-3607; or your J.H. Cohn engagement partner at 877-704-3500.