Unincorporated Business Deductions.
19 RCNY § 28-06
in effect§ 28-06 Unincorporated Business Deductions.
(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)).
(1) General. In lieu of any other deductions for net operating losses allowable under the Internal Revenue Code, a deduction shall (except as otherwise provided in paragraph (3) of this subdivision pertaining to partnerships) be allowed for net operating losses incurred by the unincorporated business in an amount computed in the same manner as the net operating loss deduction which would be allowable for the taxable year for Federal income tax purposes if the unincorporated business were an individual taxpayer (but determined solely by reference to the unincorporated business gross income and unincorporated business deductions, allocated to New York City, of the unincorporated business). Allowable deductions under this subdivision (c) shall not include any net operating loss sustained during any taxable year beginning prior to January 1, 1966.
(2) Applicable rules. For purposes of applying the foregoing, the following rules shall apply:
(i) Net operating loss deduction defined. The net operating loss deduction allowable for a taxable year under this subdivision (c) shall be an amount equal to the aggregate of
(A) the net operating loss carrybacks to such year, plus
(B) the net operating loss carryovers to such year, as determined under subparagraph (ii) below.
(ii) Amount of carryback or carryover.
(A) A net operating loss sustained for any taxable year beginning on or after January 1, 1966 shall be (a) a net operating loss carryback to each of the three taxable years preceding the taxable year of such loss, and (b) a net operating loss carryover to each of the five taxable years following the taxable year of such loss. A net operating loss for any taxable year ending after December 31, 1975, shall be a net operating loss carryover to each of the fifteen taxable years following the taxable year of such loss.
(B) The entire amount of the net operating loss sustained in any taxable year beginning on or after January 1, 1966 (referred to herein as the "loss year") may be carried back three years. The loss is first carried to the earliest of the three taxable years. If it is not entirely used to offset income in that year, it is carried to the second taxable year preceding the loss year, and any remaining amount is carried to the taxable year immediately preceding the loss year. Any unused amount of loss then remaining may be carried forward for as many as fifteen taxable years following the loss year (five for loss years prior to January 1, 1976). If the unincorporated business taxable income for the three years preceding the loss year is smaller than the entire loss, the remaining loss is carried forward first to the taxable year immediately following the loss year, then to the second taxable year following the loss year, and so on for fifteen years (five for loss years prior to January 1, 1976), or until the loss is used up. For purposes of the preceding sentence, the unincorporated business taxable income shall be computed without regard to: (a) any deduction permitted under 19 RCNY § 28-08(a) for compensation for services of the proprietor or active partners, (b) any deduction allowed under 19 RCNY § 28-08(b), (c) the unincorporated business exemptions allowable under 19 RCNY § 28-09, and (d) the net operating loss for the loss year or for any subsequent taxable year. The taxable income so computed shall not be considered to be less than zero for any year. Any taxpayer entitled to a carryback period under this subdivision (c) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1975. Such election shall be made by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for that taxable year.
(iii) Net operating loss defined. The term net operating loss as used in this subdivision (c) means (for any taxable year beginning on or after January 1, 1966) the excess of the unincorporated business deductions (other than the deductions specified in 19 RCNY § 28-08(a) and (b)) of the unincorporated business over the unincorporated business gross income computed under 19 RCNY § 28-05 allocated to New York City in accordance with the provisions of 19 RCNY § 28-07, subject to the following modifications and exceptions:
(A) No net operating loss deduction shall be allowed.
(B) No deduction shall be allowed under 19 RCNY § 28-09 relating to unincorporated business exemptions.
Example 1: The computation of a net operating loss under subparagraph (iii) above the net operating loss deductions and carrybacks and carryovers under subparagraphs (i) and (ii) above are illustrated below: The unincorporated business tax returns of an unincorporated business conducted by an individual wholly within New York City show the following:
1970 1971 1972 1973 (Loss Year)
U.B. gross income $50,000 $50,000 $62,000 $25,000
U.B. deductions $35,000 $40,000 $62,000 $60,000
Balance (for the purpose of this section, called applicable income or loss) $15,000 $10,000 $ -0- ($35,000)
Compensation for services of proprietor $3,000 $2,000 $ -0- $ -0-
Balance $12,000 $8,000 $ -0- ($35,000)
Statutory exemption $5,000 $5,000 $5,000 $5,000
Taxable income or (loss) $7,000 $3,000 ($5,000) ($40,000)
The net operating loss for the year 1973 is $35,000, the applicable loss for such year, since no allowance may be made for either a deduction for compensation for services of a proprietor or active partner under 19 RCNY § 28-08 or for the $5,000 exemption allowable under 19 RCNY § 28-09. The 1973 operating loss is carried back to 1970, and, since this is the only carryback possible to that year, it represents the "net operating loss deduction" for that year. Since the taxable income reported on the return filed for 1970, against which the net operating loss deduction can be applied, is $7,000, less than the available net operating loss deduction, allowance of this deduction on a timely application for refund will result in a refund of the entire amount of unincorporated business income tax paid for that year. The carryback to 1971 is the carryback to 1970 arrived at above ($35,000), less the applicable income for 1970 ($15,000), which applicable income was computed without regard to the 19 RCNY § 28-08 deduction for compensation for services of a proprietor or active partners, or the $5,000 exemption allowable under 19 RCNY § 28-09. This balance of $20,000 ($35,000 - $15,000) is the carry back to the year 1971 and the net operating loss deduction for that year. Since this exceeds the taxable income for such year, the filing of a timely application for refund will result in a refund of the entire amount of unincorporated business income tax paid for that year. The carryback to 1972 is the 1971 carryback ($20,000) less the applicable income for 1971 ($10,000). The balance of $10,000 ($20,000 – $10,000) is the carryback to 1972, but cannot be applied since there was no income in that year. This amount of $10,000 is therefore available as a net operating loss carryover to 1974. This amount is the carryback to 1972 ($10,000) less the applicable income for 1972 ($0), resulting in a subtraction of "zero dollars" from the $10,000 carryback to the year 1972. The balance remaining, $10,000 ($10,000 - 0), is therefore, the carryover to 1974. The net operating loss deduction in any year is equal to the sum of all carrybacks and carryforwards from subsequent or prior years to such year. Since only one net operating loss, i.e., for the year 1973, is involved, there is only one carryback or carryforward (from 1973) to each of the years herein. Accordingly, such carryback or carryforward represents the net operating loss deduction for each of such years.
The following example illustrates the application of more than one net operating loss:
Example 2: Assume the facts in the foregoing example and assume further that there was applicable income (without regard to 19 RCNY § 28-08 or 19 RCNY § 28-09 deductions or exemptions) of $2,000 for the years 1974 and 1976, $7,500 for the year 1977, and a net operating loss of $5,000 (without regard to deductions or exemptions) for the year 1975. As found in Example 1, the 1973 carryover to 1974 is $10,000. The 1973 carryover to 1975 is $8,000 ($10,000, carryover to 1974 minus $2,000, applicable 1974 income). The 1973 carryover to 1976 is also $8,000 ($8,000 carryover to 1975 minus $0, there being a loss in 1975 and the applicable income to which the net operating loss is applied cannot be less than "zero"). The 1973 carryover to 1977 is accordingly $6,000 ($8,000 - $2,000). The 1975 net operating loss of $5,000 is a carryback to 1972 in that amount. Because of the lack of income in the years 1972 and 1973, the 1975 carrybacks to 1973 and 1974 are also $5,000 each. The 1975 carryover to 1976 is also $5,000 ($5,000 carryback to 1974 minus $0, since the 1973 carryover to 1974 of $10,000 exceeded the applicable income for 1974 of $2,000). Similarly, the 1975 carryover to 1977 is $5,000 ($5,000 carryover to 1976 minus $0, since the 1973 carryover to 1976 of $8,000 exceeded the applicable income for 1976 of $2,000). The carryover from 1975 to 1978 is $3,500 ($5,000 carryover to 1977 less the $1,500 of applicable income which remained after the 1973 carryover of $6,000 was applied against the $7,500 of 1977 applicable income). The net operating loss eduction for 1972 would then be $15,000 ($10,000 carryback from 1973 plus $5,000 carryback from 1975). Similarly, by adding the 1973 and 1975 carryback. or carryovers, the net operating loss deductions for 1974, 1976 and 1977 would be $15,000, $13,000 and $11,000, respectively.
(iv) Entity entitled to deduction. A net operating loss deduction under this subdivision (c) may be allowed only to the individual or unincorporated entity who or which actually was engaged in the carrying on or the liquidation of the unincorporated business activity from which the loss was sustained or incurred. Thus, an individual who purchases a going unincorporated business from another individual will not be allowed a net operating loss deduction for any net operating loss (or any portion of a net operating loss) sustained by the vendor or transferor and the vendor or transferor will not be allowed any deduction under this subdivision based on a net operating loss sustained by the purchaser or transferee of the business. See paragraph (3) of this subdivision (c) for net operating loss deduction rules for partnerships where partner interest differ for the loss year and deduction year. However, where no material change in beneficial interest of the beneficiaries results, a change in the identity of the trustee, administrator, executor or other fiduciary of an estate or trust which is subject to the unincorporated business tax will not be deemed to result in the formation of a new or different unincorporated business tax entity for purposes of this subdivision (c).
(v) Effect of allocation. Where the unincorporated business was carried on both within and without New York City during the loss year, the net operating loss with respect to which a deduction is permitted under this subdivision shall be the amount or portion of the loss computed under subparagraph (iii) of this paragraph (2) which is allocable to New York City in accordance with the provisions of 19 RCNY § 28-07. If the business was carried on both within and without New York City during a taxable year to which a net operating loss may be carried under subparagraph (ii) of this paragraph (2), the net operating loss deduction allowable for such year shall be treated as a deduction not subject to allocation in computing the unincorporated business taxable income under 19 RCNY § 28-04. Such deduction shall, however, be taken into account, to the extent applicable, in determining the amount of
(A) any deduction for compensation for services of the proprietor or active partners under 19 RCNY § 28-08,
(B) any additional exemption allowable under 19 RCNY § 28-09, and
(C) any allocable deduction for charitable contributions in any case where the net operating loss deduction represents a carryover to the taxable year (as distinguished from a carryback) for which such net operating loss deduction is to be allowed.
Example 1: Partnership A & B, which is engaged in the carrying on of an unincorporated business both within and without New York City, sustained a net loss of $10,000 for the year 1976. Assuming that no modifications under subparagraph (iii) of this paragraph (2) are required and assuming that 80 percent of the loss is attributable to New York City sources in accordance with 19 RCNY § 28-07, the "net operating loss" for 1976 (the loss year) is $8,000 (80 percent of $10,000). Assuming further that the partnership began business on January 1, 1975 and that 75 percent of its 1975 unincorporated business taxable income (as shown below) was allocable to New York City under 19 RCNY § 28-07, the net operating loss deduction and the other adjustments required with respect to the 1975 return will be as follows:
1975 partnership unincorporated business income tax original return.
Net income from business (before deductions for contributions and service of partners) $25,000.00
Deduction for contributions (total contributions $2,000 – limited to 5% of $25,000) $1,250.00
Balance $23,750.00
Allocated to New York City (75%) $17,812.50
Deductions for partners' services (20%) $3,562.50
Net income from business $14,250.00
Specific exemption $5,000.00
Unincorporated business taxable income $9,250.00
Recomputation to allow net operating loss deduction for 1975.
Net income of business allocated to New York City per return (before deduction for partners' services) $17,812.50
Net operating loss deduction allowed (80% of $10,000) $8,000.00
Balance $9,812.50
Deduction for partners' services (20%) $1,962.50
Net income from business $7,850.00
Specific exemption $5,000.00
Unincorporated business taxable income-revised $2,850.00
In connection with the foregoing recomputation for 1975 the following points are to be noted:
(A) The net operating loss (computed by reference to the unincorporated business income and deductions allocated to New York City for the loss year) which is a carryback of $8,000 to 1975 is applied in full against the income of the business allocated to New York City in the unincorporated business income tax return for the taxable year of deduction and the amount of such net operating loss deduction is not included in or affected by the allocation percentage for the taxable year for which the deduction is allowed.
(B) The allowance of the deduction for the services of the partners has been recomputed and the new limitation based on the reduced income has been applied.
(C) The deduction for charitable contributions has not been recomputed even though the income base for limitation purposes has been reduced by the allowance of the net operating loss deduction, since a net operating loss carryback does not require a recomputation of a contributions deduction which is based on or limited to a percentage of a redefined taxable income.
Example 2: If, in Example 1 above, the partnership had not engaged in business prior to 1976, the loss year, and if the partnership income, deductions and allocation percentage were the same for 1977 as those used for 1975 in Example 1, the $8,000 net operating loss would be a carryover to 1977 and the allowable net operating loss deduction would be reflected in the 1977 liability in the following manner:
Net income from business (before net operating loss deduction, contributions and partners' service allowance) $25,000
Net operating loss $8,000
Balance (before contributions deduction) $17,000
Contributions ($2,000 – limited to 5% of $17,000) $850
Balance (after contributions deduction) $16,150
Deduction for partners' services $3,230
Net income $12,920
Allocation Schedule
Balance (after contributions deduction) $16,150.00
Add back net operating loss deduction $8,000.00
Allocation base $24,150.00
Amount allocated to New York City (75% of base) $18,112.50
Net operating loss deduction $8,000.00
Balance $10,112.50
Deduction for partners' services $2,022.50
Balance $8,090.00
Specific exemption $5,000.00
Unincorporated business taxable income $3,090.00
The computation in this example differs from Example 1 in that the deduction for contributions in Example 2 is computed by reference to an income base which reflects allowance of the net operating loss deduction for limitation purposes. The contributions deduction is determined in this way because the provision of 19 RCNY § 28-06(b) which eliminates the recomputation of contributions based on a net operating loss carryback does not apply where the situation involves the allowance of a deduction based on a net operating loss carryover. This difference requires some variation in the application of the New York City allocation percentage for the year of deduction in order to arrive at the revised income base for limitation purposes applicable respectively to deductions for contributions and services of the partners.
(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 1974 1975 1976 1977
*A 15% X 15% 25%
*B 20% 35% 15% 20%
*C 15% 20% 15% 20%
*D 40% 35% X X
*E 10% 5% 35% 10%
*F X 5% X 25%
*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:
1974 1975 1976 1977
Applicable 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 1976 Limitation 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. $90,000
Loss 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 $81,250
Amount absorbed by 1975 computation 0
Total prior allowance $81,250
Loss to be taken into account for 1977 $8,750
Limited 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)).
(1) Proprietor's services or use of capital.
(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.
(ii) Services.
(A) Amounts paid or incurred to an individual partner of the unincorporated business for services provided the unincorporated business by such an individual shall not be allowed as a deduction under paragraph (1)(i) above. The fact that the individual is providing such services not in his capacity as a partner within provisions of § 707 of the Federal Internal Revenue Code will not change the result.
(B) Amounts paid or incurred to a corporate partner for services provided the unincorporated business by the corporate partner's officers shall not be allowed as a deduction under paragraph (1)(i) above. For purposes of this paragraph, corporate officers include the chairman, president, vice-president, secretary, assistant secretary, treasurer, assistant treasurer, comptroller or any other individual charged with performing executive duties of the corporation. Payments made or incurred by the unincorporated business for services performed by an individual who is both an officer and an employee of the corporate partner may not be deducted by the unincorporated business.
(C) Amounts paid or incurred to a partnership which is a member partner in an unincorporated business for services provided the unincorporated business by a partner of the member partnership shall not be allowed as a deduction under paragraph (1)(i) above. The fact that the partner is providing such services not in his capacity as a partner within the provisions of § 707 of the Federal Internal Revenue Code will not change the result.
(D) For purpose of paragraph (1)(i) of this subdivision (d), payments to partners for services do not include amounts paid or incurred by an unincorporated business to a partner of such business which reasonably represent the value of services provided the unincorporated business by the employees of such partner, and which, if not for the provisions of paragraph (1)(i) of this subdivision (d), would constitute allowable business deductions under 19 RCNY § 28-06(a). The amounts paid or incurred for such employee services must be actually disbursed by the unincorporated business and included in that partner's gross income for Federal income tax purposes.
Example: Partnership AB, Corporation C and the individual Mr. D form a joint venture called the ABCD Construction Company to construct a building in Staten Island. Each member of the Company contributes an equal amount of capital to the venture. In addition, Mr. A, a partner in Partnership AB will serve as engineering supervisor for the construction. Ms. E, the president of Corporation C, will serve as work site supervisor. Mr. D, an attorney, will handle all the legal affairs of the Company. The office staff of partnership AB will provide all the office services needed by the Company. The in-house accounting staff of Corporation C will handle all of the Company's accounting matters. Payments made by the Company for the services of Mr. A, Ms. E and Mr. D are not allowed as deductions in the calculation of the Company's unincorporated business taxable in come. Payments made by the Company for the office and accounting services provided by the members of the joint venture will be allowed as deductions if such payments are included in the respective member's gross income for Federal income tax purposes.
(iii) Capital.
(A) Amounts paid or incurred by an unincorporated business to a partner or owner of such business for the use of monies, notes, bank deposits, shares of stock, bonds, and other securities given, loaned, advanced, pledged or otherwise made available by a partner or member of the unincorporated business to the business or on behalf of the business shall not be allowed as a deduction to the unincorporated business in the calculation of its unincorporated business taxable income.
(B) For purposes of paragraph (1)(i) of this subdivision (d) amounts paid or incurred to a partner for use of capital do not include amounts paid or incurred by an unincorporated business to a partner of such business which reasonably represent the value of the use of real or personal property (other than the property described in subparagraph (i)(A) above) of such partner by the unincorporated business and which, if not for the provisions of paragraph (1)(i) of this subdivision (d), would constitute allowable business deductions under 19 RCNY § 28-06(a). The amounts paid or incurred for such use of property must be actually disbursed by the unincorporated business and included in that partner's gross income for Federal income tax purposes. The ownership of the property must be clearly retained by the partner or member.
(C) Examples:
Example a: F and G form a partnership to engage in the construction business. F contributes $100,000 in cash to the partnership. G contributes machinery worth $100,000 to the partnership. No deduction shall be allowed to the partnership for payments made to G for use of the machinery nor to F for the use of the cash. G has not retained title to the machinery and, therefore, payments to G are not-deductible partnership distributions.
Example b: Partnership AB maintains an office in a building owned by B, a partner in AB. The partnership pays B a reasonable rental for the use of the office space. Such rental payments will be allowed as a deduction to the partnership.
Example c: X and Y form a partnership to engage in the construction business. Each contributes $100,000 in cash to the partnership. In addition, X agrees to loan the partnership $100,000. The partnership will pay X the prevailing market rate for this loan. Y agrees to lease to the partnership $100,000 worth of equipment. Under the lease, the partnership will pay Y the prevailing market rate for its leasing of the equipment. Although X will include in its gross income for Federal income tax purposes the interest income it receives on its loan to the partnership, the partnership may not deduct from its unincorporated business gross income the interest payments made to X. If Y includes in its gross income for Federal income tax purposes the rental income it receives on its leasing of the equipment to the partnership, the partnership may deduct from its unincorporated business gross income the rental payments made to Y for the equipment.
(iv) Partner. For purposes of this paragraph (1) and subdivision (a) of 19 RCNY § 28-08, a person will be considered a partner in an entity for any tax year for which that person meets the requirements of clause (A), (B), (C) or (D) below. Any person who does not meet the requirements of at least one of such clauses will not be considered to be a partner in the entity.
(A) The entity files a Federal Form 1065, Schedule K-1, with respect to that person.
(B) The person is a party to the governing document of the entity (e.g., the partnership agreement);
(C) the person is liable for all or a portion of the debts or obligations of the entity;
(D) or the person has an interest in the capital or assets of the entity.
(2) Income taxes. No deductions shall be allowed for any income taxes imposed by the City or State of New York or any other taxing jurisdiction.
(3) Certain interest, amortizable bond premiums and expense. No deductions shall be allowed for
(i) interest on indebtedness incurred or continued to purchase or carry obligations or securities, the interest on which is exempt from tax under Chapter 5 of Title 11 of the Administrative Code,
(ii) expenses paid or incurred for the production or collection of such tax-exempt income or for the management, conservation or maintenance of property held for the production of such tax exempt income, or
(iii) the amortizable bond premium on any bond, the interest income on which is so exempt. For rules regarding attribution and allocation of interest income and expenses see 19 RCNY § 28-06(h).
(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)).
(1) A deduction shall be allowed (to the extent not allowable for federal income tax purposes) for:
(i) interest on indebtedness incurred or continued to purchase or carry obligations or securities, the interest on which is subject to tax under Chapter 5 of Title 11 of the Administrative Code, but exempt from federal income tax,
(ii) ordinary and necessary expenses paid or incurred for the production or collection of such taxable income or for the management, conservation or maintenance of property held for the production of such taxable income, and
(iii) the amortizable bond premium for the taxable year on any bond, the interest on which is subject to tax under Chapter 5 of Title 11 of the Administrative Code, but exempt from federal income tax.
(2) Expenses (including interest expense) otherwise allowable which are directly attributable to any class of income (either taxable or exempt for New York City purposes) shall be allocated to the class to which they relate, and if an item is attributable to both taxable and exempt income, a reasonable portion thereof, determined in the light of all facts and circumstances, shall be allocated to each class. This paragraph does not apply to any item for which a deduction for unincorporated business tax purposes is allowable by reason of the fact that such item is allowable for Federal income tax purposes.
(3) For taxable years beginning on or after July 1, 1994, notwithstanding the provisions of paragraph (2), deductions allowable for federal income tax purposes that are directly or indirectly attributable to investment income or investment capital as defined in Administrative Code § 11-501 subdivisions (h) and (i) must be subtracted from income, gains and losses from investment capital in determining investment income.
(i) Modification for certain expenditures for industrial waste treatment facilities and air pollution control facilities. (Administrative Code 11-507(9)).
(1) General.
(i) An unincorporated business may, under conditions prescribed by this subdivision (i), elect to subtract from its unincorporated business gross income any expenditures paid or incurred during the taxable year for the construction, reconstruction, erection or improvement of industrial waste treatment facilities. For purposes of this paragraph such facilities consist only of qualifying property as defined in paragraph (2) of this subdivision (i), which is used for the treatment, neutralization or stabilization of industrial waste (as the term "industrial waste" is defined in § 17-0105 of the State Environmental Conservation Law) from a point immediately preceding the point of such treatment, neutralization or stabilization, to the point of disposal, including the necessary pumping and transmitting facilities, but excluding such facilities installed for the primary purpose of salvaging materials which are usable in the manufacturing process or are marketable.
(ii) An unincorporated business may, under conditions prescribed by this subdivision (i), elect to subtract from its unincorporated business gross income any expenditures paid or incurred during the taxable year for the construction, reconstruction, erection or improvement of air pollution control facilities. For purposes of this subparagraph such facilities consist only of qualifying property as defined in paragraph (2) of this subdivision (i), which remove, reduce or render less noxious air contaminants emitted from an air contamination source (as the terms "air contaminant" and "air contamination source" are defined in § 19-0107 of the State Environmental Conservation Law) from a point immediately preceding the point of such removal, reduction, or rendering to the point of discharge of air, meeting emission standards as established by the State Department of Environmental Conservation, but excluding such facilities installed for the primary purpose of salvaging materials which are usable in the manufacturing process or are marketable and excluding those facilities which rely for their efficacy on dilution, dispersion or assimilation of air contaminants in the ambient air after emission.
(iii) An election made with respect to a specific item of property or expenditure is binding for all subsequent tax years unless the Commissioner of Finance consents to a change with respect thereto upon such terms and conditions as he may fix. An election with respect to qualifying property of a partnership must be made by the partnership. An election with respect to qualifying property of an estate or trust shall be made by the fiduciary.
(2) Qualifying property. The term "qualifying property" means tangible property which
(i) is depreciable pursuant to § 167 of the Internal Revenue Code, and
(ii) has a situs in New York City, and
(iii) is used in the taxpayer's trade or business, and
(iv) is property, the construction, erection, reconstruction or improvement of which was initiated on or after January 1, 1966. In the case of industrial waste treatment facilities the deduction is allowed only for expenditures paid or incurred prior to January 1, 1972.
(3) Conditions for allowance. The optional deduction permitted by this subdivision (i) shall be allowed only
(i) on the condition that the facilities have been certified by the State Commissioner of Environmental Conservation or his designated representative, pursuant to §§ 17-0707 or 19-0309 of the State Environmental Conservation Law, as complying with the provisions of the State Public Health Law, the State Sanitary Code, the State Environmental Conservation Law and regulations, permits or orders promulgated pursuant thereto, and
(ii) on condition that for the taxable year and all succeeding taxable years, no deduction for such expenditures or for depreciation or amortization of the same property allowed for Federal income tax purposes shall be allowed under Chapter 5 of Title 11 of the Administrative Code, except to the extent that the basis of the property may be attributable to factors other than such expenditures, or in case a deduction is allowable pursuant to this subdivision (i) for only a part of such expenditures, on condition that any deduction allowed for Federal income tax purposes for such expenditures or for depreciation or amortization of the same property be proportionately reduced in computing unincorporated business deductions for the taxable year and all succeeding taxable years, and
(iii) on condition that no election under 19 RCNY § 28-08(b) (pertaining to special depreciation and research and development expenditures) has been exercised in respect of the property for which the deduction under this subdivision (i) is claimed.
(4) Reporting change in use of facilities. If expenditures in respect of an industrial waste treatment facility or an air pollution facility have been allowed as a deduction as provided in this subdivision (i) and if within 10 years from the end of the taxable year in which such deduction was allowed such property or any part thereof is used for the primary purpose of salvaging materials which are usable in the manufacturing process or are marketable, the taxpayer shall report such change of use in its return for the first taxable year during which it occurs, and the Commissioner of Finance may compute the tax for the year or years for which such deduction was allowed (and for any carryback or carryover year) and may assess any additional tax resulting from such recomputation within the time fixed by § 11-523(c)(8) of the Administrative Code.
(5) Reporting failure to obtain a permanent certificate of compliance. If a deduction is allowed as provided in this subdivision (i) for expenditures paid or incurred during any taxable year on the basis of a temporary certificate of compliance issued pursuant to the State Environmental Conservation Law, and if the taxpayer fails to obtain a permanent certificate of compliance upon completion of the facilities with respect to which such temporary certificate was issued, the taxpayer shall report such failure in its return for the taxable year during which such facilities are completed, and the Commissioner of Finance may recompute the tax for the year or years for which such deduction was allowed (and for any carryback or carryover year), and may assess any additional tax resulting from such recomputation within the time fixed by § 11-523(c)(8) of the Administrative Code.
(6) Trade or business. For purposes of this subdivision (i), qualifying property is used in the trade or business only when it is utilized in the actual course of the regular business operations of the taxpayer. The holding of property for investment purposes does not constitute the use of property in a trade or business within the meaning of this subdivision (i).
(7) Limitation on amount of deduction. The deduction allowed pursuant to this subdivision in respect of an item of property shall not exceed the cost or other basis of the property for Federal income tax purposes. When property subject to an election under this subdivision (i) is to be used as an industrial waste treatment facility only in part, the allowable deduction shall be limited to a proportionate part of the expenditures relating thereto.
(8) Sale or other disposition. In any taxable year when property subject to an election under this subdivision (i) is sold or otherwise disposed of, any modification made pursuant to this subdivision (i) with respect to such property shall be disregarded in computing gain or loss and the gain or loss on the sale or other disposition shall be the full gain or loss reportable by the business for Federal income tax purposes for such taxable year without regard to any provisions of the Internal Revenue Code characterizing the amount as ordinary income or loss or as a capital gain or loss.
(9) Rule for making election. An election to claim the optional deduction under this subdivision (i) shall be made by filing with the unincorporated business income tax return in which the deduction is claimed a statement evidencing such election and containing
(i) complete details of the qualifying property involved,
(ii) the computation of the deduction claimed, and
(iii) the related Federal deductions allowed in respect of such property. The return should also be accompanied by the State Department of Environmental Conservation certificate of compliance required by paragraph (3) of this subdivision (i).
(j) Modification of depletion allowance in the case of mines, oil and gas wells and other natural deposits. (Administrative Code § 11-507(10)).
(1) In the cases of mines, oil and gas wells and other natural deposits, no deduction of any allowance for percentage depletion pursuant to § 613 or § 613A of the Internal Revenue Code of 1954, as amended, shall be allowed for taxable years beginning on or after January 1, 1972. However, an allowance for depletion with respect to such property shall be deductible in the amount which would be allowable under § 611 of such Code if such deduction were computed without reference to § 613 or § 613A of such Code.
(2) With respect to the computation of depletion pursuant to this section the basis for such computation for taxable years beginning in 1972 shall be the Federal basis. For subsequent taxable years, the basis of such computation shall be reduced only by the deduction for the allowance for depletion deductible pursuant to this section.
(3) In any taxable year when any such property is sold or otherwise disposed of, with respect to which a deduction has been allowed pursuant to this subdivision (i), the gain or loss thereon entering into the computation of Federal taxable income shall be disregarded in computing unincorporated business taxable income. There shall be added to or subtracted from Federal gross income, so modified, the gain or loss upon such sale or other disposition. In computing such gain or loss, the basis of the property sold or disposed of shall be adjusted to reflect the deduction allowed with respect to such property pursuant to this subdivision (i).
(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.
(1) Allowed. (Administrative Code, § 11-507(12)). For taxable years beginning after December 31, 1981, a deduction shall be allowed for any amount which the taxpayer could have excluded from unincorporated business gross income had it not made the election provided for in § 168(f)(8) of the Internal Revenue Code as it was in effect for safe harbor lease agreements entered into prior to January 1, 1984, except with respect to property which is a qualified mass commuting vehicle described in § 168(f)(8)(D) of the Internal Revenue Code as it was then in effect.
(2) Disallowed. (Administrative Code § 11-507(13)). For taxable years beginning after December 31, 1981, no deduction shall be allowed for any amount deductible for Federal income tax purposes solely as a result of an election made pursuant to § 168(f)(8) of the Internal Revenue Code as it was in effect for safe harbor lease agreement entered into prior to January 1, 1984, except with respect to property which is a qualified mass commuting vehicle described in § 168(f)(8)(D) of the Internal Revenue Code.
(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.
Source: City of New York, Charter, Administrative Code and Rules (American Legal Publishing XML export, codelibrary.amlegal.com)URL: https://codelibrary.amlegal.com/codes/newyorkcity/latest/NYCrules/0-0-0-39335Fetched: 10/24/2026