Lawmakers have a deep fondness for acronyms in naming tax legislation. Witness the SUNY Tax-Free Areas to Revitalize and Transform Upstate New York program — or, START-UP NY. The START-UP NY legislation was passed in June 2013, and the New York State (NYS) Department of Taxation and Finance published extensive guidance on the START-UP NY […]
Lawmakers have a deep fondness for acronyms in naming tax legislation. Witness the SUNY Tax-Free Areas to Revitalize and Transform Upstate New York program — or, START-UP NY.
The START-UP NY legislation was passed in June 2013, and the New York State (NYS) Department of Taxation and Finance published extensive guidance on the START-UP NY program in the last quarter of 2013. It’s important for business owners and investors to understand at least a broad view of the program, and to grasp some details of the tax benefits and incentives it offers.
START-UP NY has a stated goal of “promoting entrepreneurialism and job creation by transforming higher education to create tax-free communities across the state, particularly in upstate New York, to attract high-tech and other start-ups, venture capital, new business, and investment from across the world.”
A detailed review of the technical guidance released by the NYS Department of Taxation and Finance and the 49 pages of regulations from the New York State Department of Economic Development do make one thing clear. There is tremendous potential inherent in the program to accomplish its stated goal to incentivize companies, particularly high-tech and other start-up firms, to start, grow, and stay in New York.
Another observation that immediately comes to mind in reviewing the regulations is that unlocking those potential benefits for New York business owners and investors will be an involved process — requiring a cohesive, coordinated effort by the business, its advisors, higher-education institutions, and local economic-development organizations.
Let’s start with what is actually the culmination of the process — the tax benefits and incentives that are available once a business is successful in navigating through the steps of the program, which became effective Jan. 1, 2014. An approved company operating in a designated “tax-free” zone will be eligible for tax breaks that, in general, last for up to 10 years from the date the business is approved for the program. The following is only a summary of these benefits. The actual potential benefits a business may be able to realize will be highly dependent on the facts and circumstances of each case.
Corporate and personal tax incentives
Income tax is essentially eliminated for income deemed to be generated from the tax-free zone. This elimination takes the form of a refundable credit against income tax. The credit is available for corporations, as well as owners of pass-through entities, such as partnerships and S corporations. There are numerous calculations involved to determine the income tax deemed to be generated from the zone. And, as all the investment TV ads say, “Individual results may vary.” Each situation needs to be reviewed to determine the potential benefit.
Another key component is the exclusion of employee wages from personal income tax. This benefit can be substantial, but is limited to employees whose positions are deemed to be “net new jobs” to New York state. Shifting jobs from one in-state location to another, or from one employee, won’t qualify. While beyond the scope of this article, the definition of “net new jobs” is a key component to qualifying for any of the available credits.
Additional tax benefits include a sales-tax exemption for sales made within the zone. Use-tax paid on purchases made can also be exempt, if consumed within the zone. There is also a provision for sales-tax exemption for taxes incurred by contractors for constructing or improving property within the zone.
Other tax benefits include exemptions from license and maintenance fees, real-property transfer taxes, and possible real-property tax exemptions.
Navigating the process
Now that we have summarized the benefits, the key question is, how does a company get there?
There are four steps in the process:
1. The first step is to have a college or university identify space eligible to be designated tax-free. There are various rules that the educational institution must follow to determine its qualifying eligible space, depending on its location and type of institution. In general, qualifying space, which may be unimproved land or real property, must be located on campus, or in some circumstances, within a designated zone expected to be a short distance away.
2. The second step is to have the college or university submit its plan for approval to New York state. The plan must identify, among other things, the space, what kind of businesses the school is attempting to attract, how the community will be enhanced by the program, and how the partnership with qualifying businesses will enrich the institution’s achievement of its academic mission.
Once approved, the college or university may start soliciting businesses. Several educational institutions have already been approved. A review of qualifying properties listed on the START-UP NY website in early February revealed more than 100 qualifying properties of varying types across the state.
3. The third step is where the business owner and investor take action. Businesses need to apply with the applicable school for approval. Briefly, a company must be either a new start-up business, an existing New York state company that is expanding, or a company looking to move into the state. Expanding New York companies must demonstrate that the expansion is creating new jobs, and not shifting jobs from one in-state location to another. Additionally, the business must not be in competition with other businesses already operating in the same local community.
Only certain types of businesses qualify, with an emphasis on manufacturing and high-tech. In general, retail businesses, restaurants, professional-services firms, and businesses in the hospitality field, among others, will not qualify.
4. The fourth step is the payoff; this is where qualifying businesses and their owners can start to utilize the credits and tax incentives outlined at the start of this article. The tax benefits can be substantial, and can carry on for up to 10 years, as long as the business stays qualified. Annual reporting to New York state is required to show that employment benchmarks have been maintained to stay qualified.
Ultimately, the START-UP NY program should be viewed as offering tremendous potential tax benefits to qualifying businesses, but it is not a simple process to get there. Our state is viewed, justifiably, as having an overall high cost of doing business and having extensive regulatory hurdles compared to other states and worldwide locations. One positive thing that New York does have is a strong and vibrant higher-education system, and this program attempts to combine that asset with the business community. That goal is commendable. If it works, educational institutions, their communities, and businesses that are able to take advantage of the programs will benefit on a long-term basis. Only time, and a coordinated effort by businesses and their advisers, higher education, and local economic-development departments, will tell how successful and far-reaching the benefits of START-UP NY will be.
Jeffrey Corey, CPA, is a partner at The Bonadio Group, and is the leader of the accounting firm’s state and local tax practice team. Contact him at jcoreybonadio.com