If an S corporation shareholder can't deduct her full flow-through loss on her federal return because of a basis limitation, does she still have to add back the entire bonus depreciation amount for New York tax purposes?

Plain-English summary

The Petitioner is a New York City resident who is the 100% shareholder of a corporation that elected S corporation status at both the federal and New York State levels. For 2008, the S corporation anticipated a federal tax loss of about $500,000, generated in part by $1,200,000 of bonus depreciation allowed under IRC § 168(k). Under IRC § 1367, however, the Petitioner could not claim the full $500,000 loss on her 2008 federal return because she lacked sufficient stock or debt basis in the S corporation - she could only claim $700,000 of the pass-through loss, with the remaining $500,000 carried forward until her basis increased. As a result, her federal adjusted gross income (FAGI) for 2008 was $0.00.

The Petitioner asked whether this basis limitation gave her any relief from Tax Law § 612(b)(8), which separately requires an S corporation shareholder to add back to FAGI the bonus depreciation passed through from the S corporation, in computing New York taxable income.

The Department concluded there is no relief. Even though her FAGI was $0.00 (because the federal basis limitation curbed how much loss she could claim), Tax Law § 612(b)(8) still required her to add back the entire $1,200,000 of bonus depreciation that was passed through to her - not just the portion she was able to deduct federally. The only offset available is the subtraction under Tax Law § 612(c)(16), which lets her claim the depreciation deduction she could have taken under IRC § 167 had bonus depreciation under IRC § 168(k) never been enacted, computed under Tax Law § 612(k). Beyond that subtraction, the Tax Law provides no other modification or offset to the § 612(b)(8) add-back. The $500,000 loss carried forward for federal purposes can eventually be claimed in computing FAGI and New York taxable income, but only once, and to the extent that, her S corporation basis increases under IRC § 1367.

What this means for you

S corporation shareholders limited by basis under IRC § 1367

If your federal basis limits how much of an S corporation's flow-through loss you can currently deduct, that limitation does not reduce or excuse the New York addition modification under Tax Law § 612(b)(8). You must add back the full amount of bonus depreciation passed through to you, even if your FAGI is $0.00 and even though only part of the related loss was usable on your federal return.

Accountants and tax professionals

When a client's federal loss deduction is constrained by IRC § 1367 basis limits, don't assume that constraint also limits the New York bonus-depreciation add-back - the two computations are independent. Remember to apply the Tax Law § 612(c)(16)/§ 612(k) offset, which lets the client subtract the depreciation that would have been allowable under pre-bonus-depreciation IRC § 167, and track any disallowed federal loss carried forward for future years when S corporation basis increases.

Common questions

Q: Does a shareholder's federal basis limitation under IRC § 1367 reduce the amount that must be added back under Tax Law § 612(b)(8)?
A: No. The Department held there is no relief from § 612(b)(8) - the full amount of bonus depreciation passed through from the S corporation must be added back, regardless of how much of the related loss the shareholder could actually claim on her federal return.

Q: The Petitioner's FAGI was $0.00 for the year - does that mean there's nothing to add back?
A: No. FAGI is only the starting point for New York taxable income; the Tax Law § 612 modifications, including the § 612(b)(8) add-back, apply on top of FAGI even when FAGI itself is zero.

Q: Is there any offset available for the bonus depreciation add-back?
A: Yes, but only one: Tax Law § 612(c)(16) permits a subtraction, computed under Tax Law § 612(k), equal to the depreciation deduction that would have been allowable under IRC § 167 as if the property had been acquired before IRC § 168(k) took effect. No other modification or offset applies.

Q: What happens to the $500,000 loss the Petitioner couldn't claim federally in 2008?
A: It carries forward under IRC § 1367 and can be claimed in computing FAGI and New York taxable income once, and to the extent that, her adjusted basis in the S corporation increases enough to absorb it.

Citations and references

• Tax Law § 612(a) - federal adjusted gross income is the starting point for New York adjusted gross income, subject to the modifications in § 612
• Tax Law § 612(b)(8) - requires add-back of IRC § 168(k) bonus depreciation passed through to an S corporation shareholder
• Tax Law § 612(c)(16) - permits a subtraction modification tied to the deduction computed under Tax Law § 612(k)
• Tax Law § 612(k) - allows the depreciation deduction that would have been allowable under IRC § 167 as if the property were acquired before IRC § 168(k)'s enactment
• IRC § 168(k) - federal bonus depreciation provision generating the addition modification
• IRC § 1367 - limits an S corporation shareholder's loss deduction to her adjusted stock and debt basis

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a09_12i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(12)I
Income Tax
September 23, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I090518B

The petition asks whether name redacted, who is an S corporation shareholder and is unable to
currently deduct the flow-through loss from her S corporation on her Federal income tax return, has any
relief from New York Tax Law §612(b)(8), which requires her to add back to her Federal adjusted gross
income the bonus depreciation allowed under Internal Revenue Code §168(k).
We conclude that, in determining Petitioner’s New York taxable income, there is no relief under the
Tax Law and she must add back the full amount of the bonus depreciation that was passed through to her
from her S corporation pursuant to Tax Law §612(b)(8).
Facts
Petitioner is a New York City resident and is the 100% shareholder of a corporation that has made an
S corporation election at both the Federal and New York State levels. For 2008 the S corporation is
anticipating a Federal tax loss of approximately $500,000. This loss is generated, in part, by $1,200,000 of
bonus depreciation allowed in accordance with IRC §168(k). Pursuant to IRC §1367, Petitioner is unable to
claim the $500,000 loss on her 2008 Federal income tax return because she has no stock or debt basis in the
S corporation. Further, pursuant to Tax Law §612(b)(8), in calculating Petitioner’s New York State adjusted
gross income requirements, she must add back the IRC §168(k) bonus depreciation she claimed in computing
her Federal adjusted gross income (FAGI). This requirement means that Petitioner must add back
$1,200,000 to FAGI when computing her New York taxable income.
Analysis
In determining Petitioner’s New York taxable income, the starting point is her Federal adjusted gross
income (FAGI), subject to the modifications set forth in § 612.1 According to the facts provided, Petitioner’s
FAGI for tax year 2008 was $0.00 as a result of a loss passed through from her S corporation. This loss was
the result of $1,200,000 of IRC §168(k) bonus depreciation passed through to Petitioner from the S
corporation. This loss was reduced by IRC §1367, which limited Petitioner’s loss to her adjusted basis in the
S corporation. Thus, Petitioner was able to claim only $700,000 of the bonus depreciation that the S
corporation passed through to her. The remaining $500,000 will be carried forward as a loss until such time
as Petitioner has either sufficient income from the S corporation or an increase in her S corporation basis to
offset the carry forward loss.
While Petitioner’s FAGI is $0.00, as stated above, in determining New York taxable income, FAGI
is only the starting point. The addition modification under Tax Law §612(b)(8) requires her to add back the
$1,200,000 of bonus depreciation she claimed on her federal return. But Tax Law §612(c)(16) permits

1

Tax Law § 612(a), General. The New York adjusted gross income of a resident individual means his federal adjusted
gross income as defined in the laws of the United States for the taxable year, with the modifications specified in this section.

-2-

TSB-A-09(12)I
Income Tax
September 23, 2009

Petitioner to claim a deduction pursuant to Tax Law §612(k)2. Therefore, while Petitioner is required to add
back the $1,200,000 of bonus depreciation, she is allowed to subtract the depreciation deduction that was
available under IRC §167 before IRC §168(k) was enacted.
Other than Tax Law §612(k), the Tax Law does not provide for any additional modifications or
offsets to the add-back provisions of Tax Law §612(b)(8), even if Petitioner’s FAGI is $0.00. Therefore,
while Petitioner’s FAGI is $0.00, she is required to add back the bonus depreciation, in determining her
New York taxable income, less any depreciation deduction she can claim pursuant to Tax Law §612(k). The
$500,000 loss carried forward, that Petitioner was unable to claim on her 2008 federal return, can be claimed
in determining her FAGI and New York taxable income at such time, and to the extent, that her basis in the S
corporation has been increased and is available pursuant to IRC §1367.

DATED: September 23, 2009

NOTE:

2

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.

Tax Law §612(k), “… a taxpayer shall be allowed with respect to such property the depreciation deduction allowable
under §167 of the Internal Revenue Code as such section would have applied to such property had it been acquired by the taxpayer
on September tenth, two thousand one.”