Corporate Income Tax in New York

April 13, 2006

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New York imposes a tax on domestic and foreign corporations for exercising their corporate franchise, or for doing business, or employing capital, or owning or leasing property, or maintaining an office in New York state. This is true for both "regular" C corporations as well as S corporations. Therefore, this tax will apply to you if you do business as a corporation and you exercise your corporate franchise or conduct certain activities within the state.

The New York corporate income tax is sometimes referred to as a "franchise tax" but is measured by net income and by the value of subsidiary capital allocated to New York. (New York net income is your entire federal net income with adjustments.) Your accountant or tax professional can help you determine the income from your business that's taxable in New York.

If you're a foreign corporation, you will not be subject to tax in New York if you engage solely in interstate commerce. What does this mean? Well, it basically means New York will impose their franchise tax on you only if you're engaged in doing business in New York, employing capital, owning or leasing property, or maintaining an office in the state. What does New York consider "doing business?" The term is used in a comprehensive sense and includes all activities which occupy the time or labor of persons for profit. If your corporation is organized for profit and carrying out any of the purposes of its organization, New York deems it to be doing business for purposes of the franchise tax. Also keep in mind that your corporation is subject to the New York franchise tax if it engages in the above types of activities regardless of whether it is authorized to do business in New York.

Syd's Surf and Sail, a Florida corporation, used the New York home of one of it's corporate officers to conduct business. The officer's New York residence was held out to the public as a place of business and the home was used for business meetings. Although Syd's is a Florida corporation, the above activities constituted maintaining an office (and therefore, doing business) for New York franchise tax purposes.

The concept of what does and what doesn't constitute "doing business" is by no means simple. If you are uncertain as to whether your foreign corporation may be subject to the New York franchise tax, we encourage you to speak to your tax advisor concerning this matter.

C corporation taxes. If you are a corporation that's subject to the franchise tax, the franchise tax rate is .09 percent of your subsidiary capital plus the greater of:

7.5 percent of net income
0.178 percent of capital (not to exceed $350,000)
2.5 percent of minimum taxable income or
a fixed dollar minimum tax ($1,500 maximum)

New York has a special lower graduated tax rate for qualified small businesses. To qualify, your business cannot have net income greater than $290,000 or capital or paid-in surplus of more than $1 million.

For tax years beginning before July 1, 2003, the amount of tax imposed is 7.5 percent of the entire net income base up to $290,000.

For tax years beginning on or after July 1, 2003, the amount of tax imposed is 6.85 percent of the entire net income base up to $200,000. If the entire net income is over $200,000 but not over $290,000, the tax due is the sum of $13,700, plus 7.5 percent of the entire net income base over $200,000, and 3.25 percent of the excess entire net income base over $250,000.

S corporation taxes. New York imposes a franchise tax on S corporations. The franchise tax is equal to the greater of the franchise tax that would be computed on the net income of a New York C corporation or the fixed dollar minimum tax, reduced by the amount of tax that would be computed on the net income based on the highest personal income tax rate in effect for the tax year; provided, however, that the franchise tax isn't less than the fixed dollar minimum tax. Starting July 1, 2003, the rate used is 7.1425 percent.

Just as we discuss above for C corporations, qualifying small business S corporations pay a lower tax rate on their net income.

Save Money

The maximum franchise tax rates are currently greater than the maximum personal income tax rates. The New York S corporation franchise tax is designed to eliminate the difference between the corporate tax rate and personal tax rate. The New York S corporation franchise tax imposes tax burdens on the combined incomes of S corporations and their shareholders that are comparable to the tax burdens imposed on C corporations. It doesn't, however, impose a double tax burden, which is imposed on C corporations and their shareholders, so the tax advantages of operating your business as an S corporation are preserved. Also, note that the New York S corporation minimum franchise tax is $325, while the C corporation minimum franchise tax can be as high as $800.

S corporation shareholders are, of course, taxed on their pass-through items when computing their New York personal income tax.

Did You Know?

The New York State Department of Taxation and Finance has a publication that's a basic guide which provides a general overview to assist taxpayers in determining whether to elect New York S corporation status. The topics discussed include qualifications for an S election, termination and revocation of the election, New York corporate level taxation of federal S corporations, New York license and maintenance fee requirements for foreign S corporations, treatment of shareholders of both federal and New York S corporations and sales of S corporation stock. You can contact the Department of Taxation and Finance and request Publication 35, "New York Tax Treatment of S Corporations and Their Shareholders".