Albany Approves UBT Tax Cut Proposals

This past summer, the New York State Legislature approved two tax cut proposals affecting unincorporated business proprietors and partnerships in New York City. The tax cuts had been included within the City’s fiscal 1998 budget adopted by the Mayor and Council in June, but required approval in Albany before actually becoming law.

First, the unincorporated business tax (UBT) credit was raised so that taxpayers with (pre-credit) liabilities of less than $1,800 will pay no such tax, while those with liabilities between $1,800 and $3,200 will enjoy a partial credit. With the increased UBT credit, beginning in tax year 1997, UBT liability is effectively eliminated for unincorporated business proprietors and partnerships with income of $55,000 or less, and it is reduced for those with incomes up to $90,000.

Secondly, Albany enacted a new personal income tax (PIT) credit for City residents, which will affect those taxpayers with UBT liability remaining after application of the credit described in the previous paragraph. The credit is for a portion of UBT payments made by such resident taxpayers, and is applicable against taxpayers’ PIT liability. The actual percentage of UBT payments that would be eligible for the PIT credit depends on the taxable income of the resident taxpayer. Specifically, for tax year 1997, residents with taxable personal income of $42,000 or less would be entitled to a credit equal to 65 percent of UBT payments. For personal income levels greater than $42,000, the percent of UBT payments that may be claimed as a PIT credit gradually falls as income increases up to $142,000, at which point the credit equals 15 percent of UBT payments for this and higher levels of income. A variety of factors—such as the filing status, the share of business income allocated to the City, the share of personal income due to the unincorporated business income, as well as the amount of personal income—determine how much of a credit individual taxpayers will enjoy. For example, a married couple with two children and $150,000 in total income, all of which comes from New York City and two-thirds of which comes from a sole proprietorship, would receive a PIT credit of $666 if they file jointly and take the standard deduction. For tax years after 1997, the new State law also permits local law, as determined by the City Council and the Mayor, to increase (but not decrease) the credit without the need for additional State legislation.