§ 28-06 Unincorporated Business Deductions.
RCNY § 28-06
(a)General. (Administrative Code § 11-507). Except as otherwise provided in this section, the unincorporated business deductions of an unincorporated business engaged in or being liquidated by an individual or unincorporated entity mean the items of loss and deduction of the individual or unincorporated entity which are allowable for Federal income tax purposes for the taxable year and which are directly connected with or incurred in the conduct or the liquidation of the business, including losses and deductions connected with any property of the individual or unincorporated entity employed in the business. The deductions of the unincorporated business for Federal income tax purposes determined under this section shall be subject to the modifications and limitations hereinafter set forth.
(b)Charitable contributions. (Administrative Code § 11-507(1)).
(1)General. A deduction shall be allowed for charitable contributions of the unincorporated business to the extent that such contributions would be deductible for Federal income tax purposes if made by a corporation. The amount of this deduction, however, shall not be greater than five percent of the amount by which the unincorporated gross income of the unincorporated business exceeds the sum of (i) the unincorporated business deductions computed without the benefit of any deduction of charitable contributions, and (ii) the deduction allowed under 19 RCNY § 28-08(b) where the election permitted by such Section has been exercised with respect to the claiming of a special depreciation deduction or a research or development expenditure deduction for certain qualified property. Personal charitable contributions, that is, contributions not made by the unincorporated business itself, are not deductible for unincorporated business tax purposes even if they are of the type which would be deductible for Federal income tax purposes if made by a corporation. To be deductible for unincorporated business tax purposes, the charitable contribution must be directly connected with, or incurred in, the conduct of the unincorporated business, an entity separate and distinct from the owners or operators of the business.
(2)Applicable rules. For purposes of applying the foregoing, the following rules shall apply: (i) Charitable contributions defined. The term "charitable contributions" means a contribution or gift of the type which is allowable to a corporation under § 170 of the Internal Revenue Code and the applicable regulations thereunder.
(ii)Limitations. For purposes of determining whether the charitable contributions of an unincorporated business are in excess of five percent of the amount by which the unincorporated business gross income exceeds the unincorporated business deductions, the unincorporated business deductions shall be determined without regard to (A) any amount allowable under this subdivision (b), (B) any deduction for services of the proprietor or active partners allowable under 19 RCNY § 28-08(a), (C) any deduction allowed under 19 RCNY § 28-08(b) (pertaining to special depreciation and research and development expenditures), and (D) any net operating loss carryback (as distinguished from a carry over) to the taxable year allowed under 19 RCNY § 28-06(c).
(iii)Charitable contributions carryover. Except as otherwise provided in subparagraph (2)(iv) below, any contributions made by an unincorporated business in a taxable year (hereinafter in this subparagraph (iii) referred to as the contribution year), in excess of the amount deductible in such contribution year under the prescribed five percent limitation are deductible, in accordance with the provisions of the Internal Revenue Code each of the five succeeding taxable years in order of time, but only to the extent of the lesser of the following amounts: (A) the excess of the maximum amount deductible for such succeeding taxable year under the prescribed five percent limitation, over the sum of the contributions made in that year, plus the aggregate of the excess contributions which were made in taxable years before the contribution year and which are deductible under this subparagraph (iii) in such succeeding taxable year; or (B) in the case of the first taxable year succeeding the contribution year, the amount of the excess contributions, and in the case of the second, third, fourth, or fifth taxable year succeeding the contribution year, the portion of the excess contributions not deductible under this subparagraph for any taxable year intervening between the contribution year and such succeeding taxable year. Example: A partnership which is engaged in carrying on an unincorporated business wholly within New York City and which reports its income on a calendar year basis, makes charitable contributions amounting to $3,000 in each of the years 1968 through 1977. Its taxable net income for limitation purposes was $40,000 for 1968 and also for each of the years 1970 through 1976. Its taxable net income for limitation purposes in 1969 and 1977 was $100,000. The maximum amount of deductible contributions which may be permitted is, accordingly, $2,000 for each of the calendar years 1968 and 1970 through 1976 (five percent of $40,000) and $5,000 for the years 1969 and 1977 (five percent of $100,000). For the year 1968 the amount allowed as a deduction is $2,000, the maximum amount allowable for such year. The excess contribution of $1,000 ($3,000 actually contributed in 1968, less $2,000 the maximum allowable amount) is allowable as a carryover. For the year 1969 the amount allowed as a deduction is $4,000 ($3,000 actually contributed in 1969 plus $1,000 carryover from the year 1968), since the amount of $4,000 allowed as a deduction is less than $5,000 maximum amount which is permitted as a deduction for the year 1969. For each of the years 1970 through 1976 the amount allowed as a deduction is $2,000, resulting in a carryover of $1,000 for each of such years. For the year 1977 the amount allowed as a deduction is $5,000, which is the maximum amount allowable as a deduction for such year. This amount includes $3,000 actually contributed in 1977, plus the $1,000 contribution carryover for the year 1972, plus the $1,000 contribution carryover for the year 1973. The carryover for the years 1970 and 1971 are no longer permitted as deductions since more than five succeeding taxable years have elapsed since such years. Since the maximum amount which may be taken as a deduction in 1977 is $5,000, there remain outstanding carryovers for the years 1974, 1975 and 1976 in amounts of $1,000 for each year.
(iv)Special rule for unincorporated business having net operating loss carryover. In determining the extent to which a charitable contributions carryover under subparagraph (iii) above may be permitted, the amount by which (A) the charitable contributions made by the unincorporated business in a taxable year to which this subdivision applies exceeds (B) the maximum amount deductible in such year under the limitation prescribed by subparagraph (ii) above shall be reduced to the extent that such excess decreases the unincorporated business taxable income (as computed for purposes of 19 RCNY § 28-06(c) pertaining to net operating loss carryover and carryback computations) and increases a net operating loss carryover under 19 RCNY § 28-06(c) to a succeeding taxable year. Example: An unincorporated business which began operations on January 1, 1971 sustained a net operating loss of $25,000 for the calendar year 1971. In 1972, the excess of the unincorporated business gross income over the unincorporated business deductions (without reference to a deduction for contributions or any net operating loss carryover) was $25,000. The contributions made by the business in 1972 amounted to $1,250. By reason of the carryover of the 1971 net operating loss of $25,000 to 1972, and because of the five percent limitation applicable to the deduction for contributions, no deduction for contributions is allowable for the year 1972. The $1,250 of contributions made in that year accordingly represents an "excess of contributions" within the meaning of subparagraph (iii) of this paragraph (2). This excess, however, is subject to a reduction of $1,250 because it has both (a) decreased the amount of the "applicable income" (under 19 RCNY § 28-06(c)) for 1972 ($25,000 minus $1,250 of contributions or $23,750) and (b) increased the net operating loss carryover available to 1973 (1971 loss of $25,000 minus the 1972 "applicable income" of $23,750 instead of minus the $25,000 of taxable 1972 income). The amount of the reduction of the excess of contributions based on the foregoing is $1,250 because that is the amount of both the decrease and increase computed above. $1,250 of the 1971 net operating loss remains as a carryover to 1973.
(v)Election by unincorporated business on an accrual method. An unincorporated business reporting its unincorporated business taxable income on an accrual method may elect to have a charitable contribution considered as paid during the taxable year provided payment is actually made on or before the 15th day of the third month following the close of the taxable year and if the contribution was pledged or made under a commitment made in writing by the unincorporated business during the taxable year. An election under this subparagraph (v) must be made at the time the return for the taxable year is filed. The election shall be made by including the contribution in the deduction claimed for contributions for the taxable year and by filing with the return a written declaration signed by the proprietor or an active partner showing (A) the name and address of the recipient of the contribution or gift, (B) the date the contribution was pledged and the amount of the pledge, and (C) the amount deducted on account of the pledge and the date of actual payment of the amount so deducted.
(c)Net operating loss. (Administrative Code § 11-507(2)).
(vi)Tax law applicable to computation. In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.
(vii)Methods of claiming net operating loss deduction. (A) Where the amount of a net operating loss deduction for a taxable year can be ascertained at the time the unincorporated business tax return for the taxable year is due, the deduction shall be claimed in the return and there shall be filed with the return a concise statement setting forth the amount of the deduction and all material and pertinent facts relative thereto including a detailed schedule showing the computation of the amount deducted. (B) Where a taxpayer is entitled to a net operating loss deduction for a taxable year and the amount thereof (or a portion of such amount) cannot be ascertained at the time the unincorporated business tax return for the taxable year is due, the return shall be filed without regard to the unascertainable amount of the deduction. If the amount of such deduction (or portion thereof) is subsequently established, the taxpayer may, within the applicable period of limitations, file a claim for refund based on such deductions. (C) Notwithstanding any other provision of law (including § 11-527(a) and § 11-514 of the Administrative Code), a claim for refund under this subparagraph (vii) may be filed with the Commissioner of Finance at any time within three years from the time the return was due for the taxable year in which a net operating loss is sustained plus the period of any extension of time to file the tax return due for the loss year.
(viii)Periods of less than 12 months. A fractional part of a year which is a taxable year under 19 RCNY § 28-17 is a taxable year for all purposes of this subdivision (c) pertaining to net operating loss deductions.
(ix)In computing a net operating loss for a taxable year beginning in 1981, no accelerated cost recovery system deduction shall be allowed with respect to recovery property under § 168 of the Internal Revenue Code. In lieu of such deduction, a taxpayer shall be allowed for such recovery property the depreciation deduction allowable under § 167 of the Internal Revenue Code as such section was in full force and effect on December 31, 1980.
(3)Partnership net operating loss. In the case of a partnership, no net operating loss carryback or carryover to any taxable year shall be allowed unless one or more of the partners during each such taxable year for which a deduction is claimed (deduction year) were persons having a proportionate interest, or interests, during the loss year, amounting in the aggregate to at least 80 percent of all such interests in the unincorporated business gross income and deductions of the partnership which sustained the loss for which a carryback or carryover is claimed. Where a partnership qualifies for a net operating loss deduction under the preceding sentence the carryback or carryover allowable on account of such loss shall be limited to a percentage of the net operating loss deduction otherwise allowable. Such percentage shall be determined by dividing, (i) the sum of the proportionate interests in the unincorporated business gross income and deductions of the partnership for the deduction year attributable to persons who were partners in both the year of the deduction and the loss year, by (ii) 100. This percentage shall be applied against the lesser of (A) the carryover or carryback allowable for the taxable year or (B) the unincorporated business taxable income for the taxable year as computed in paragraph (2)(ii) of this subdivision (c). The amount by which the carryback or carryover otherwise allowable exceeds the amount allowable pursuant to the foregoing limitation shall not be a carryback or carryover to any other taxable year. The rules for determining the amount of a net operating loss, the deductibility thereof as a carryover and/or carryback and the related provisions of this subdivision (c) are applicable to net operating losses of partnerships to the extent they are not inconsistent with the provisions of this paragraph (3). Example: Y Co. partnership operated by individuals A, B, C, E and G sustained a net operating loss of $90,000 in 1976. The first partnership return filed in the name of Y Co. to cover business activities of any of the individual partners was for the year 1974. The partners in Y Co. for the years 1974, 1975, 1976, and 1977 and their percentages of interest in the partnership income and deductions were as follows: Name of Partner 1974197519761977*A 15% X15%25%*B 20%35%15%20%*C 15%20%15%20%*D 40%35%XX*E 10%5%35%10%*F X5%X25%*G X X 20% X 100% 100% 100% 100% * Denotes partner was member in firm in both "loss year" and "deduction year." The pertinent items of income and deduction were as follows: 1974197519761977Applicable income$81,250 $56,250 ($90,000) $68,750 Partners' service allowance$16,250 $11,250 -0- $13,750 Net income$65,000 $45,000 ($90,000) $55,000 Exemption$5,000 $5,000 -0- $5,000 Taxable income$60,000 $40,000 ($90,000) $50,000 On the foregoing information, the unincorporated business net operating loss deductions would be follows: The 1976 loss of $90,000 is available as a carryback to 1974 because the interests of A, B, C and E and (who were partners in both the 1974 and 1976 entities) constituted 80 percent of the total ownership for 1976. 1974 Computation New operating loss as computed for 1976Limitation on loss for 1974-Sum of proportionate interests of A, B, C and E per partnership returns in the 1974 deduction year is 60 percent.$90,000Loss recognized for deduction purposes 60 percent of $81,250 (the lesser of the amount of carryback or taxable income for 1974 as computed under paragraph (2)(ii) of this subdivision (c) =$48,750 1975 Computation No carryback allowable because the partners for 1975 who also held interests in the 1976 entity owned only 65 percent of the total in 1976. In other words, the 80 percent common ownership test was not satisfied. 1977 Computation This entity qualifies for a carryover because the interests of A, B, C and E in the 1976 (loss year) partnership amounted to 80 percent of the total interests for the 1977 deduction year. The calculation of the 1977 carryover will be: Net operating loss per 1976 return$90,000 Amount of loss absorbed by 1974 carryback$81,250Amount absorbed by 1975 computation0Total prior allowance$81,250Loss to be taken into account for 1977$8,750Limited to 75 percent, representing the sum of the interests of A, B, C and E in 1977 =$6,562.50 (d) Nondeductible items. (Administrative Code § 11-507(3), (4), (5), (6) and (7)).
(i)General. (A) No deduction shall be allowed, except as provided in 19 RCNY § 28-08, for amounts paid or incurred to a proprietor or partner for services or for use of capital. (B) In addition to all other amounts otherwise included, amounts paid or incurred to a proprietor or partner for services or for use of capital shall include any amount paid to any person if, and to the extent that, the payment was consideration for services or capital provided by a proprietor or partner. (C) Examples: Example a: A sole proprietor who does his own bookkeeping, billing and other administrative services may not deduct the cost of his time and skill in providing such services. Example b: Salaries, commissions, consultant fees or professional fees paid to a general or limited partner for personal services rendered by the partner, either as an employee or an independent contractor of the unincorporated business, may not be deducted by the partnership. Example c: Fixed annual payments made to retired partners under the terms of the partnership agreement, although deductible as "guaranteed payments" for Federal income tax purposes, may not be deducted. Example d: Interest paid to a general or limited partner for monies contributed or loaned to the partnership may not be deducted by the partnership. Example e: A sole proprietor may not claim a rental expense deduction for the use of real or personal property owned by him. Example f: Partner A of Partnership ABC performs services for the partnership for which she is entitled to receive $500,000. As part of a divorce settlement, Partner A instructs the partnership to pay this amount directly to her ex-spouse. The $500,000 amount is considered to have been paid to Partner A for services and is not deductible.
(4)Certain capital loss items. No deduction shall be allowed in respect of the excess of net long-term capital gain over net short-term capital loss, as these terms are defined in § 1222 of the Internal Revenue Code of 1954, but capital losses incurred in the unincorporated business shall be treated as ordinary losses and shall be allowed in full. No distinction shall be made for unincorporated business income tax purposes between long-term and short-term capital gains and losses incurred in the unincorporated business. All gains and losses, whether pertaining to capital assets or otherwise are reportable at 100%, except where otherwise provided in these regulations. In addition, no consideration shall be given to any net capital loss carryover permitted under any section or provision of the Internal Revenue Code for Federal income tax purposes.
(5)Certain special depreciation and research and development expenditures. Where an election has been made under 19 RCNY § 28-08(b), no deduction shall be allowed for expenditures with reference to the property to which such election relates, or for depreciation of such property except as permitted by said section.
(6)Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, no deduction shall be allowed for any expenses directly or indirectly attributable to activities described in 19 RCNY § 28-02(g)(1)(v) if, and to the extent that, such activities are not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g).
(7)Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, in the case of a taxpayer that is an unincorporated entity eligible for the partial self trading exemption described in 19 RCNY § 28-02(g)(4), no deduction shall be allowed for any losses or expenses directly or indirectly attributable to the sale or other disposition of an interest in another unincorporated entity if, and to the extent that, the activities of such other unincorporated entity are not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g).
(8)Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after July 1, 1994, no deduction shall be allowed for interest, depreciation or any other expense directly or indirectly attributable to the holding, leasing or managing of real property if, and to the extent that, such holding, leasing or managing of real property is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(2)(ii).
(9)Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, no deduction shall be allowed for interest, depreciation or any other expense of an owner, lessee or fiduciary holding, leasing or managing real property that are directly or indirectly attributable to parking, garaging or motor vehicle storage services provided on a monthly or longer term basis to tenants at such real property if, and to the extent that, the provision of such services to such tenants is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(2)(iii).
(e)[Reserved.] (f) [Reserved.] (g) [Reserved.] (h) Deductions for certain other interest, amortizable bond premiums and expenses. (Administrative Code § 11-507(8)).
(j)Modification of depletion allowance in the case of mines, oil and gas wells and other natural deposits. (Administrative Code § 11-507(10)).
(k)Deduction for certain wages and salaries. (Administrative Code § 11-507(11)). For all taxable years beginning after December 31, 1976, a deduction shall be allowed for that portion of wages and salaries not allowed as a business expense deduction for Federal income tax purposes under § 280C of the Internal Revenue Code (relating to Federal jobs credit).
(l)Safe harbor deductions.
(m)Accelerated cost recovery system deductions. (Administrative Code § 11-507(14)). For taxable years beginning after December 31, 1981, except with respect to recovery property subject to the provisions of § 280-F of the Internal Revenue Code, and recovery property placed in service in New York in taxable years beginning after December 31, 1984, and before 1994, no deduction shall be allowed for the amount allowable as the accelerated cost recovery system deduction pursuant to § 168 of the Internal Revenue Code. Note that for years prior to 1994, the disallowance of accelerated cost recovery deductions for property placed in service outside New York has been held to be unconstitutional.
(n)Recovery property depreciation. (Administrative Code § 11-507(15)). For taxable years beginning after December 31, 1981, except with respect to recovery property subject to the provisions of § 280-F of the Internal Revenue Code, and recovery property placed in service in New York in taxable years beginning after December 31, 1984, and before 1994, and provided a deduction has not been disallowed by 19 RCNY § 28-06(1)(2), a taxpayer shall be allowed with respect to recovery property the amount allowable as the depreciation deduction pursuant to § 167 of the Internal Revenue Code as such section would have applied to property placed in service on December 31, 1980. Note that for years prior to 1994, the disallowance of accelerated cost recovery deductions for property placed in service outside New York has been held to be unconstitutional.
