Deductions Not Subject to Allocation.
19 RCNY § 28-08
in effect§ 28-08 Deductions Not Subject to Allocation.
(a) Compensation for services of proprietor and acting partners. (Administrative Code, § 11-509(a)).
(1) General. In addition to amounts paid to employees as salaries, wages or other personal service compensation, which are allowable as unincorporated business deductions under 19 RCNY § 28-06, deductions are also allowed for reasonable compensation for personal services of a proprietor and for personal services of each partner actively engaged in the conduct of the unincorporated business, including a corporate partner which, through its officers, actively engages in the business of the partnership. It is not necessary that the amount deducted on account of the services by the proprietor or a partner be credited to the account of or actually withdrawn by such person. The reasonableness of any deduction under this subdivision (a) shall be subject to determination by the Commissioner of Finance. An administrator, executor, trustee, receiver or other fiduciary who, in his fiduciary capacity, carries on the unincorporated business of an estate, trust or entity for which he acts is not a proprietor or partner for purposes of this subdivision (a). Amounts paid to retired partners are not deductible. Deductions allowable for services of a proprietor or a partner described above are not subject to allocation even though the unincorporated business is carried on both within and without New York City.
(2) Limitations on deduction for compensation. Any deduction allowable under paragraph (a)(1) of this subdivision (a) shall not exceed $5,000 for a proprietor or for each active partner and the aggregate of such deductions shall not exceed 20 percent of the unincorporated business taxable income computed without the benefit of this deduction or the unincorporated business exemptions permitted under 19 RCNY § 28-09. Where the business is carried on both within and without New York City, these limitations apply to and are computed with reference to the excess of the allocable unincorporated business gross income over the allocable unincorporated business deductions apportioned to New York City.
Example 1: A, an individual, has unincorporated business taxable income (computed without deductions for compensation for his services or the unincorporated business exemptions) of $15,000. He actually with drew from the business a salary of $6,000. Assuming the amount drawn would not exceed a reasonable allowance, the allowable deduction for A's services is $3,000, (20% of the $15,000) which in this case is the maximum deduction allowable. The $5,000 limitation is not applicable because it exceeds the 20% of income limitation on the aggregate of allowable deductions for compensation of a proprietor and active partners under the foregoing subdivision.
Example 2: If, in Example 1 above, A withdrew no salary, the $3,000 would be allowable as a deduction for his services, assuming such amount would not exceed a reasonable allowance under the circumstances.
Example 3: A, an individual, has unincorporated business taxable income (computed without deductions for compensation for his services or the unincorporated business exemptions) of $30,000. He did not charge or withdraw any salary from the business. Assuming the amount would not exceed a reasonable allowance, the maximum allowable deduction for A's services is $5,000. The 20% of income limitation has no application here because the amount thereof, $6,000 (20% of $30,000), exceeds the limitation of $5,000 for each individual.
Example 4: Partnership XYZ has unincorporated business taxable income (computed without benefit of deduction for compensation for services of partners or the unincorporated business exemptions) of $40,000. No salaries are paid or credited to any of the partners. The firm has two active partners, X and Y, and one inactive partner, Z. Assuming the amount would not exceed a reasonable allowance, the maximum allowable deduction for the services of the two active partners, X and Y, is $8,000 (20% of $40,000). No deduction under this subdivision (a) is allowable with respect to the inactive partner, Z. The limitation of $5,000 for each active partner is not applicable here because the amount thereof, $10,000 ($5,000 each for X and Y), would exceed the 20% of income limitation on the aggregate of allowable deductions under this subdivision (a).
Example 5: Assuming the same facts as those in Example 4, except that the unincorporated business income (computed without deduction for compensation for partners' services or the unincorporated business exemptions) is $60,000, then the deductions under this subdivision (a) representing a reasonable allowance for services of the active partners cannot exceed $10,000 ($5,000 for each partner). Here again, no deduction is allowable with respect to the inactive partner, Z. The 20% of income limitation has no application here because the amount thereof, $12,000 (20% of $60,000), exceeds the aggregate of the maximum allowable individual deductions of $5,000 per active partner.
Example 6: Assuming the same facts presented in Example 5, except that the business was carried on both within and without New York City, with 80% of the income allocable to New York City, the maximum deduction for reasonable compensation for the services of the active partners is $9,600, computed as follows:
Total taxable income (without deduction for services of partners or unincorporated business exemptions) $60,000
Portion allocated to New York City (80%) $48,000
Aggregate deduction for active partners, X and Y, limited to 20 percent of amount allocated to New York City $9,600
Example 7: XYZ Partnership is engaged in the business of making commercial loans. The partnership consists of 2 individuals, X and Y and one corporation, Z Corporation. The officers of Z Corporation have a background in investments and real estate. They advise the partnership regarding loans under consideration, attend meetings of the partnership and consult with the other partners relating to accepting or rejecting loan applications. XYZ Partnership is entitled to a deduction for reasonable compensation paid to its three active partners, not to exceed the lesser of $15,000 or 20% of the unincorporated business taxable income.
(3) For purposes of this subdivision, a person will be considered a partner of an entity if that person would be considered to be a partner under 19 RCNY § 28-06(d)(1)(iv).
(b) Modifications for special depreciation and research and development expenditures. (Administrative Code § 11-509(b)).
(1) General.
(i) At the election of the taxpayer, special optional modifications for depreciation of certain property and for certain expenditures for property used for research or development purposes are permitted, without allocation under 19 RCNY § 28-07, upon the terms and conditions prescribed by this subdivision (b). Either or both of the deductions set forth in subparagraphs (1)(ii) and (1)(iii) of this paragraph (1) shall be allowed, except that only one of these deductions shall be allowed with respect to any one item of property.
(ii) Where an individual, partnership, estate or trust constructs, reconstructs, erects or acquires qualifying property as defined in paragraph (2) of this subdivision (b), there shall, subject to the terms and conditions prescribed by this subdivision (b), at the election of the taxpayer, be allowed in respect of such qualifying property a deduction for depreciation not exceeding twice the depreciation allowed with respect to the same property for Federal income tax purposes. A deduction pursuant to this subparagraph (ii) is allowed only upon the condition that no other deduction for depreciation of such property shall be permitted for the taxable year.
(iii) Subject to limitations prescribed in this subdivision (b), a taxpayer likewise may, in lieu of any deduction (as an expenditure or as depreciation) otherwise allowable for Federal income tax purposes, elect to deduct any amount expended during the taxable year for the construction, reconstruction, erection or acquisition of qualifying property, as defined in paragraph (2) of this subdivision (b) which is used for purposes of research or development in the experimental or laboratory sense. Such purposes do not include the ordinary testing or inspection of materials or products for quality control, efficiency surveys, management studies, consumer surveys, advertising, promotions or research in connection with literary, historical or similar projects.
(iv) Any amount allowed for Federal income tax purposes as depreciation or as an expenditure with respect to the property which is the subject of an election under subparagraphs (ii) or (iii) of this paragraph (b) shall be added to the taxpayers Federal adjusted gross income for the taxable year.
(v) An election made with respect to a specific item of property or expenditure is binding for all subsequent taxable years unless the Commissioner of Finance consents to a change with respect thereto upon such terms and conditions as he may fix.
(vi) An election with respect to qualifying property of a partnership must be made by the partnership and shall apply to all partnership members. An election with respect to qualifying property of an estate or trust shall be made by the fiduciary and shall be binding on all beneficiaries of the estate or trust.
(2) Qualifying property. The term "qualifying property" means tangible personal 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) (A) the construction, reconstruction or erection of which is completed after December 31, 1967, and then only with respect to that portion of the basis thereof or the expenditures relating thereto which is properly attributable to such construction, reconstruction or erection after December 31, 1963, or
(B) acquired after December 31, 1967, by purchase as defined in § 179(d) of the Internal Revenue Code, if the original use of such property commenced with the taxpayer, commenced in New York City and commenced after December 31, 1965.
(3) Limitations.
(i) The total of all deductions allowed pursuant to this subdivision (b) in any taxable year or years with respect to an item of property shall not exceed the cost or other basis of the property for Federal income tax purposes. Only one election, either to claim additional depreciation, or to claim a deduction as an expenditure for property used for research or development, may be made in connection with any one item of property which qualifies for election under subparagraphs (i) and (ii) of paragraph (1) of this subdivision (b). When property subject to an election under this subdivision (b) is used or to be used for research or development only in part, or during only part of its useful life, the allowable special deduction shall be limited to a proportionate part of the expenditures relating thereto.
(ii) With respect to the depreciation deduction allowed under subparagraph (1)(ii) of paragraph (1), such deduction shall be allowed with respect to property described in this paragraph (2) only on condition that such property shall be principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing. For purposes of the preceding sentence, manufacturing shall mean the process of working raw materials into wares suitable for use or which gives new shapes, new qualities or new combinations to matter which already has gone through some artificial process by the use of machinery, tools, appliances and other similar equipment. Property used in the production of goods shall include machinery, equipment or other tangible property which is principally used in the repair and service of other machinery, equipment or other tangible property used principally in the production of goods, and shall include all facilities used in the manufacturing operation, including storage of material to be used in the manufacturing, and of the products that are manufactured.
(iii) At the option of the taxpayer, air and water pollution control facilities which qualify for elective deductions under 19 RCNY § 28-06(i), may be treated, for purposes of this paragraph (2), as tangible property principally used in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing, in which event, a deduction shall not be allowed under such 19 RCNY § 28-06(i).
(iv) No deduction shall be permitted under this subdivision (b) for research and experimental expenditures treated as deductible expenses under § 174(a) of the Internal Revenue Code or as amortizable deferred expenses under § 174(b) of the Internal Revenue Code (such expenditures will be reflected in the computation of New York City taxable income through the use of Federal amounts in accordance with the general provisions of these regulations).
(v) With respect to the depreciation deduction under subparagraph (1)(ii) of this subdivision (b), for any taxable year beginning on or after January 1, 1968, no deduction is allowed for tangible personal property leased to any other person or corporation. Any contract or agreement to lease or rent or for a license to use such property is considered a lease; provided, however, that with respect to property which a taxpayer uses for purposes other than leasing for part of a taxable year and leases for another part of a taxable year, a deduction may be taken in proportion to the part of the year such property is used by the taxpayer.
(vi) The special depreciation and expenditure deduction is only allowed with respect to property which has not been the subject of a depreciation deduction pursuant to 19 RCNY § 28-06. With respect to the expenditure deductions allowed by subparagraph (1)(iii) of this subdivision (b), such expenditure deduction shall be allowed only if for the taxable year and all succeeding taxable years, no deduction shall be allowed pursuant to 19 RCNY § 28-06 on account of such expenditures or on account of depreciation of the same property, except to the extent that its basis may be attributable to factors other than such expenditures, or in case a deduction is allowable pursuant to this paragraph for only a part of such expenditures, on condition that any deduction allowable for federal income tax purposes on account of such expenditures or on account of depreciation of the same property shall be proportionately reduced in determining the deductions allowable pursuant to 19 RCNY § 28-06 for the taxable year and all succeeding taxable years.
(vii) In the case of an unincorporated business carried on both within and without New York City, the total of the deduction for depreciation or the deduction for expenditures shall not exceed
(A) such expenditures, and in the case of depreciation, its costs or other basis,
(B) multiplied by the allocation percentage determined under 19 RCNY § 28-07, which is used in allocating the excess of the taxpayer's unincorporated business gross income over its unincorporated business deductions to New York City for the first year such depreciation is deducted or the first year such expenditure is paid or incurred, whichever is applicable.
(4) A similar special depreciation or expenditure deduction applies with respect to tangible personal property, having a situs in the City, used in the taxpayer's trade or business, and acquired, constructed, erected or reconstructed between January 1, 1966 and December 31, 1969. For definitions, limitations and requirements, see § 11-509(b) of the Administrative Code.
(5) Adjustment of basis upon sale or other disposition.
(i) In any tax able year when property, with respect to which a deduction under this subdivision (b) has been allowed, is sold or otherwise disposed of, the basis of such property shall be adjusted to reflect such deduction and if the basis as so adjusted is lower than the adjusted basis of the same property for Federal income tax purposes, the difference between the basis as so adjusted and the adjusted basis of the same property for Federal income tax purposes shall be added to the taxpayer's Federal adjusted gross income (or Federal taxable income of a fiduciary, where applicable) in determining New York City unincorporated business taxable income.
(ii) A sale or disposition of qualifying property includes any transfer or exchange without regard to whether gain or loss from the transaction is recognized for Federal income tax purposes. (Even if the gain or loss from the sale or disposition is a long-term capital gain or loss for Federal income tax purposes, the amount to be taken into account under this paragraph (5) shall be the entire difference between the adjusted bases.)
(6) Reporting change in use of research or development property. If a taxpayer has been allowed a deduction under subparagraph (1)(iii) of this subdivision (b) for an expenditure for a qualifying research or development property and such property is used for purposes other than research or development to a greater extent than originally reported, the taxpayer shall report such use in the return for the first taxable year during which it occurs, and the Commissioner of Finance may recompute the tax for year or years for which the deduction was made and may assess any additional tax resulting from such recomputation within the time fixed by § 11-523(c)(7) of the Administrative Code.
(7) Carryover of unused deductions. If the deductions allowable under this subdivision (b) for any taxable year exceed the taxpayer's unincorporated business taxable income determined without the allowance of such deductions, the excess may be carried over to the following taxable year or years of the same taxpayer (without allocation under 19 RCNY § 28-07) in computing unincorporated business taxable income for such year or years. If a carryover under this subdivision (b) is claimed, complete details of the computation of the carryover must be submitted with the taxpayer's return.
(8) Rule for making elections. An election to deduct additional depreciation or expenditures for research or development purposes under this subdivision (b) shall be made by filing with the unincorporated business income tax return or returns in which such deductions are claimed a statement evidencing such election and containing complete details of the qualifying property involved and the computation of the related deduction and modification. (Such statement and information shall be submitted on form NYC-324, "Special Depreciation and Expenditure Schedule.")
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/0-0-0-39712Fetched: 10/24/2026