If a single-member LLC that already claims Empire Zone tax credits elects to be taxed as a subchapter S corporation, does that change how its Empire Zone benefits are calculated?

Plain-English summary

Petitioner was a single-member limited liability company (SMLLC) treated as a disregarded entity for tax purposes. It had been certified under Article 18-B of the General Municipal Law before August 1, 2002, and had been claiming a range of Empire Zone (EZ) tax benefits: the wage tax credit (WTC), the EZ investment tax credit (EZ ITC), the EZ employment incentive credit (EZ EIC), the qualified empire zone enterprise (QEZE) real property tax credit (RPTC), and the QEZE tax reduction credit (TRC). Petitioner was considering filing a federal S corporation election under Internal Revenue Code § 1362 and a corresponding New York election under Tax Law § 660, and asked whether that change would affect how its EZ credits are calculated.

The Department concluded that, in general, it would not. Under the federal "check-the-box" regulations, an S corporation election under the IRC automatically triggers a deemed election to be classified as a corporation (rather than a disregarded entity) under Treasury Regulation § 301.7701-3(c)(1)(v)(C) - no separate entity-classification election is needed. New York follows that federal classification, but a business must still separately elect New York S corporation treatment under Tax Law § 660 for income, loss, and other items to pass through to the shareholder. Throughout the change, Petitioner's single owner and its EIN stay the same; only the reporting mechanics shift, from Schedule C/Form IT-201-ATT to New York Schedule K-1 and CT-601/603/604/606 forms filed at the S corporation level.

Because the same individual remains the taxpayer before and after the election, the Department found that each credit's benefit period, base years, test year, and employment numbers carry forward without interruption. The change in classification is not treated as a "disposition" of EZ ITC property or as a new "purchase," so the property's basis and required period of qualified use simply aggregate the DE years and the S corporation years - but that also means no new EZ ITC can be generated on property already owned unless new qualifying funds are spent. The EZ EIC, which depends on the taxpayer being allowed the EZ ITC, follows the same logic, and QEZE RPTC/TRC eligibility likewise continues based on Petitioner's original certification date and base period.

One caution stood apart from the "no change" conclusion: while an SMLLC/disregarded entity and its single member are normally treated as one taxpayer for certification purposes, a New York S corporation is a separate taxpayer from its shareholder and must be independently certified under Article 18-B of the General Municipal Law to claim EZ benefits going forward.

What this means for you

SMLLCs weighing an S corporation election

If your Empire Zone-certified SMLLC is thinking about electing federal and New York S corporation status, this opinion indicates the switch generally will not reset your EZ credit clocks - the same base years, test year, and employment numbers keep applying, and benefit periods aren't extended or restarted just because the entity's tax classification changed. But don't assume EZ ITC keeps flowing on old property: because the reclassification isn't a "purchase," you can't generate new EZ ITC on property you already owned unless you spend new qualifying funds after the election.

Accountants and tax professionals

Confirm separately that the resulting S corporation is (or remains) certified under Article 18-B of the General Municipal Law - certification does not automatically carry over from the disregarded entity to the corporate taxpayer that succeeds it, even though the credit calculations themselves are unaffected. Also route the mechanics correctly: EZ credits move from Forms IT-601/603/604/606 and IT-201-ATT to CT-601/603/604/606 reported to the shareholder on New York Schedule K-1, then claimed by the shareholder on IT-201-ATT.

Common questions

Q: Does electing to be taxed as an S corporation restart the 5-year Empire Zone wage tax credit benefit period?
A: No. Because the same individual remains the underlying owner, the WTC benefit period, base years, test year, and employment number carry over unchanged from the disregarded-entity years to the S corporation years.

Q: Can the SMLLC claim a fresh EZ investment tax credit on equipment it already owned before the S corporation election?
A: No, not on that same property. The reclassification isn't treated as a "disposition" (so no gain/loss and the old basis carries over), but it also isn't a "purchase," so no new EZ ITC arises unless new funds that qualify for the credit are actually spent after the change.

Q: Does the S corporation need its own Empire Zone certification?
A: Yes. Although an SMLLC/disregarded entity and its single member are generally treated as one taxpayer for certification purposes, a New York S corporation is a separate taxpayer from its shareholder and must be separately certified under Article 18-B of the General Municipal Law.

Q: What happens to the QEZE real property tax credit and tax reduction credit after the election?
A: They continue for the balance of the benefit period that began when Petitioner was first certified, using the same base period, test year, test date, and employment numbers - aggregating time as a disregarded entity and as an S corporation.

Q: Is the fixed dollar minimum tax under Article 9-A new after the S election?
A: Yes - once the Tax Law § 660 election is made, the New York S corporation itself becomes subject to the fixed dollar minimum tax under Article 9-A, even though the pass-through income and EZ credits still flow to the same individual shareholder under Article 22.

Citations and references

• Tax Law § 660(a) - requires an affirmative election for a business to be treated as a New York S corporation
• Tax Law § 660(i) - an S election may be deemed for New York purposes under certain circumstances
• Tax Law § 208.1 - defines "corporation" to include a federal association election, including an LLC
• Tax Law § 210.1(g) - imposes the fixed dollar minimum tax under Article 9-A on a New York S corporation
• Tax Law § 606(i) - treats an S corporation shareholder as the taxpayer for the corresponding EZ investment tax credit base
• Tax Law § 606(j) and § 606(j-1) - EZ investment tax credit and EZ employment incentive credit available to S corporation shareholders
• Tax Law § 14(b) and § 14(j)(4)(B) - QEZE employment test and the new business test exception for entities certified before August 1, 2002
• General Municipal Law Article 18-B - governs Empire Zone certification of a business enterprise
• 20 NYCRR § 106.1(i)(1)(v)(f) and § 106.7 / § 5-10.8(g) - define "disposition" of qualified property for EZ investment tax credit purposes
• Treasury Regulation § 301.7701-3(c) - governs an eligible entity's classification election, including the deemed corporate classification that follows an S election
• Internal Revenue Code § 351 - nonrecognition of gain or loss on a transfer of property to a corporation solely for stock, in exchange for control

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_14i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-09(14)I
Income Tax
November 4, 2009

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I070724B

Petitioner is a single-member limited liability company (SMLLC), treated as a disregarded entity
for tax purposes. It asks whether the calculation of its Empire Zone (EZ) tax benefits will be affected if it
elects under the federal treasury regulations to be taxed as a subchapter S corporation. The EZ tax credits
in question are the wage tax credit (WTC), the EZ investment tax credit (EZ ITC) and EZ employment
incentive credit (EZ EIC), the qualified empire zone enterprise (QEZE) real property tax credit (RPTC),
and the QEZE tax reduction credit (TRC).
We conclude that the calculation of Petitioner’s credits, in general, will not be affected.
Facts
Petitioner was certified under Article 18-B of the General Municipal Law prior to August 1, 2002
and has been claiming certain EZ tax credits. An entity like Petitioner that is not classified as a
corporation under certain federal regulations1 is “an eligible entity” and can elect its classification for
federal tax purposes. An “eligible entity” with a single owner may be classified as either an association
or a disregarded entity (DE).2 If a business elects to be classified as an association, it will be treated for
federal tax purposes as a corporation.3 New York follows the election chosen by the taxpayer.
Petitioner has an EIN separate and apart from the social security number of its single member. A
SMLLC will be treated as a DE unless it makes an election to change its classification4 under Treasury
Regulation 301.7701-3(c). Petitioner, at the time this petition was submitted, had made no such election.
Thus, Petitioner reports its income or loss on federal Schedule C, which is included in the individual tax
return of its single member, who files under Article 22 of the Tax Law. The credits it claims are
calculated on Forms IT-601, IT-603, IT-604, and IT-606, and claimed on Form IT-201-ATT submitted by
its single member.
In the proposed transaction, Petitioner would file an S corporation election under Internal
Revenue Code (IRC) §1362 and New York Tax Law §660. For federal purposes, when Petitioner makes
an S corporation election under the IRC, no actual election under Treasury Regulation 301.7701-3(c)(1)
would be required for Petitioner to be classified as a corporation. Under Treasury Regulation 301.77013(c)(1)(v)(C), Petitioner will be deemed to have made the election to become a corporation, as opposed to
a DE, effective when the S corporation election is made. After the change in tax classification, Petitioner
will continue to be owned by the same individual and the EIN of the business will remain the same. As a
New York S corporation, Petitioner will calculate the EZ tax benefits on CT-601, CT-603, CT-604, and

1

Treasury Regulation 301.7701-2(b))(1), (3), (4), (5), (6), (7), or (8).
Treasury Regulation 301.7701-3(a).
3
Treasury Regulation 301.7701-2(b)(2).
4
Treasury Regulation 301.7701-3(b).
2

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CT-606, and report them to the shareholder on New York Schedule K-1. The shareholder will claim the
tax benefits on IT-201-ATT to reduce the tax under Article 22.
Analysis
To claim any of the credits above, an entity must be certified under Article 18-B of the General
Municipal Law (GML) and meet the other statutory requirements for the credits. Issues related to
certification of an entity are not within our purview. For purposes of this opinion, we will assume that
Petitioner is and remains certified. We caution, however, that although an SMLLC/DE and its single
member are generally treated as one taxpayer, and either of them may be certified in order for the single
member to claim the EZ tax credits, this is not the case when the SMLLC is classified as an S corporation.
For purposes of New York Tax Law, an S corporation is regarded as a separate taxpayer from its single
shareholder and must be separately certified.5
Federal regulations permit certain business entities, such SMLLCs, to elect to be classified for tax
purposes as either a DE or an association (and thus, a corporation), and periodically to change the elected
tax classification of the entity. 6 While Petitioner does not plan to convert to an S corporation by means of
incorporation, the tax attributes are the same under federal tax law as if a legal change in the entity had
occurred. Under federal regulations, a change in tax classification from a DE to an association is
accorded tax attributes consistent with the provisions for non-recognition of gain and losses under the
provisions of the IRC.7 IRC §351 provides that no gain or loss is recognized, if property is transferred to
a corporation by one or more persons solely in exchange for stock in the corporation, and immediately
after the exchange, such person or persons are in control of the corporation.
New York follows federal law in treating an SMLLC as either a DE or an association (i.e., as a
corporation for tax purposes). If an SMLLC elects to be treated as an association for federal purposes, it
will be taxed under Article 9-A of the Tax Law. “The term ‘corporation’ includes (a) an association
within the meaning of paragraph three of subsection (a) of section seventy-seven hundred one of the
internal revenue code (including a limited liability company)….”8 New York, however, does not
automatically follow the federal S corporation election. The members of the entity must affirmatively
elect under §660 of the Tax Law to be treated as a New York S corporation, in order for the entity to pass
through items of income, loss, deduction, and reductions for taxes, which are taken into account for
federal income tax purposes for the taxable year.9 If the election under §660 is made, the New York S
corporation itself is subject to the fixed dollar minimum tax under Article 9-A.10 Aside from that tax, the
tax liability for income or loss of Petitioner would be passed through to the same Article 22 taxpayer,
regardless of Petitioner’s tax classification.
For purposes of the EZ WTC, Petitioner will calculate the credit at the S corporation level and
pass the credit through to its member. The change in the tax classification from a DE to an S corporation
does not change the legal make-up of the entity; the member of the SMLLC remains the same. Therefore,
the change in the classification of a DE to an S corporation should not extend the 5-year benefit period for
5

NYT-G-07(5)(C),(1)I.
26 C.F.R. §301.7701-3(a).
7
26 C.F.R. §301.7701-3(g)(4).
8
§ 208.1 of the Tax Law.
9
§ 660(a) of the Tax Law. Note that under certain circumstances, an S election will be deemed for New York tax
purposes. See §660(i).
10
§210.1(g).
6

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the WTC. The EZ WTC will be available to Petitioner treated as a New York S corporation for the
remaining years in which Petitioner treated as a DE could have claimed the credit. The base years, test
year, and employment number for those years are the same for the period that Petitioner was treated as an
S corporation and the period when Petitioner was treated as a DE. The credit, once calculated, will then
be passed through to the same individual taxpayer, that is, the shareholder of the S corporation, and
reported under Article 22.
For purposes of the EZ ITC, changing the tax classification of Petitioner from a DE to a New
York S corporation will not be viewed as a disposition of the property. The EZ ITC provides, in general,
that a disposition of qualified property includes a contribution of property to a partnership or corporation,
unless a substantial interest in the ownership of the trade or business is retained by the transferor. 11 In
this case, Petitioner’s single member, whether Petitioner is classified as a DE or subsequently as an S
corporation, would remain the same and continue to claim the credit against the Article 22 taxes; the title
to the property would be held by the same legal entity, the SMLLC; and the property would continue in
the qualified use. Such qualities are inconsistent with the principles in the definition of a disposition,
outlined in the regulations governing the EZ ITC.12 Thus, if Petitioner’s tax classification is changed
from a DE to a New York S corporation, no disposition will be deemed to have occurred, the basis of the
property will remain the same as when Petitioner was treated as a DE, and the required period of qualified
use will be calculated by aggregating the years of use by the SMLLC when classified as a DE and when
classified as a New York S corporation. Because Petitioner treated as an S corporation will take over the
property at the basis established when Petitioner was treated as a DE, the change does not qualify as a
“purchase,” and Petitioner may not claim the EZ ITC after the change in classification unless new funds
that qualify for the EZ ITC are expended. Any carryover credit not used prior to the change in
classification may be carried over by the single member and subtracted from the single member’s income
tax.
A shareholder of a New York subchapter S corporation eligible to claim the EZ ITC13 will be
treated as the taxpayer with respect to the corresponding credit base of such corporation.14 The EZ EIC is
available when a taxpayer is allowed the EZ ITC and an employment test is met.15 Because both the EZ
ITC and the EZ EIC are allowed to a shareholder of an S corporation under §606(i) of the Tax Law,
Petitioner’s single member will be able to claim both credits.
For purposes of the QEZE RPTC and QEZE TRC, a business enterprise must be certified under
Article 18-B of the General Municipal Law and pass the employment test in §14(b) of the Tax Law. This
QEZE statute, unlike other statutes for EZ tax benefits, requires the “business enterprise” to be certified,
as opposed to “the taxpayer.” Although “business enterprise” is not defined in the Tax Law, it can be said
that the “business entity” is Petitioner, the SMLLC. Thus, when Petitioner elects to be treated as an S
corporation, it may claim the credits for the benefit period remaining to Petitioner when it was treated as a
DE. The base years, test year, and employment number for those years are the same for the period that
Petitioner was treated as an S corporation and the period when Petitioner was treated as a DE. For a
corporation first certified before August 1, 2002, the new business test is not applicable, if the business
enterprise has a base period greater than zero and an employee in the base period.16 Your letter states that
11

20 NYCRR §106.1(i)(1)(v)(f).
20 NYCRR §106.7 and §5-10.8(g).
13
§606(j) of the Tax Law.
14
§ 606(i) of the Tax Law.
15
§ 606(j-1) of the Tax Law.
16
§14(j)(4)(B) of the Tax Law.
12

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Income Tax
November 4, 2009

Petitioner has been claiming EZ tax benefits. Thus, it appears that the new business test is inapplicable.
If the other requirements of the statutes are met, Petitioner will be eligible to earn the QEZE RPTC and
the QEZE TRC for the balance of the benefit period, which began in the year when Petitioner was first
certified. The base period of Petitioner, test year, test date, and calculations of the employment test and
employment number will include the period of time when the SMLLC is classified as a DE and when it is
classified as an S corporation.

DATED: November 4, 2009

NOTE:

/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.