Can a nonresident partner claim an additional passive activity loss to offset New York's required bonus-depreciation add-back, even though the partnership had a larger overall economic loss?

Plain-English summary

Petitioner, a nonresident of New York, held investments in real estate through partnerships. For tax year 2010, those partnerships had significant economic losses. For federal purposes, the losses were characterized as IRC § 168(k)(2) bonus depreciation losses, treated as passive activity losses and limited to the amount of passive activity income. The bonus depreciation deduction was large enough to bring Petitioner's federal adjusted gross income (FAGI) down to zero.

New York, however, does not fully follow the federal bonus depreciation deduction. Tax Law § 612(b)(8) requires an add-back of the federal bonus depreciation claimed on IRC § 168(k)(2) property. In its place, § 612(c)(16) and § 612(k) allow a smaller subtraction, computed as if the property had been depreciated under the pre-bonus-depreciation IRC § 167 schedule (as though acquired on September 10, 2001). Because the required add-back exceeded the allowed subtraction, these New York modifications, combined with the federal passive-loss limitation, left Petitioner owing New York State income tax for 2010 - even though her FAGI was zero and even though the partnership's overall economic losses exceeded the New York adjustments.

Petitioner asked whether she could claim an additional passive activity loss, equal to the New York adjustments, on either the Federal or New York State column of her return, and whether she should really be subject to New York tax given the partnership's larger economic loss. The Department answered both questions against her: there is no Tax Law provision allowing such an additional loss, and the size of the partnership's economic loss does not change the fact that, after applying the required modifications, Petitioner had New York source income and therefore owed New York tax.

What this means for you

Nonresident partners in leveraged real estate partnerships

If you are a nonresident partner whose partnership claimed federal bonus depreciation under IRC § 168(k)(2), expect a New York add-back under Tax Law § 612(b)(8) that is larger than the offsetting subtraction under § 612(c)(16) and § 612(k). That mismatch can produce New York tax liability even when your federal adjusted gross income is zero, and even when the partnership's overall economic loss is larger than the New York adjustment itself - there is no mechanism to claim an extra passive activity loss to close that gap.

Accountants and tax professionals

When reconciling a nonresident client's Article 22 return against a partnership K-1 involving bonus-depreciated property, calculate the § 612(b)(8) add-back and the § 612(c)(16)/§ 612(k) subtraction separately; do not assume they offset. New York source income under Tax Law § 631(a) is FAGI from New York sources as adjusted by these modifications, not simply the partner's share of the partnership's overall federal or economic loss.

Common questions

Q: Why did Petitioner owe New York tax when her federal adjusted gross income was zero?
A: Her zero FAGI resulted from a federal bonus depreciation deduction that New York requires be added back under Tax Law § 612(b)(8). The offsetting New York subtraction under § 612(c)(16) and § 612(k) was smaller, so after the required modifications she had positive New York source income.

Q: Can a nonresident partner claim an extra passive activity loss to make up the difference between the add-back and the subtraction?
A: No. The Department found no provision in the Tax Law that allows a taxpayer to claim an additional passive activity loss equal to the New York adjustments, on either the Federal or New York State column of the return.

Q: Does it matter that the partnership's overall economic loss was larger than the New York adjustments?
A: No. A partner in a partnership with New York source income is subject to New York tax based on her New York source income after modifications, regardless of the size of the partnership's overall economic loss.

Q: What is the difference between the add-back and subtraction modifications at issue?
A: The add-back under § 612(b)(8) restores the federal bonus depreciation deduction actually claimed on IRC § 168(k)(2) property. The subtraction under § 612(c)(16) and § 612(k) instead allows only the depreciation that would have been available under the pre-bonus-depreciation IRC § 167 schedule, which is typically smaller.

Citations and references

• Tax Law § 631(a) - New York source income of a nonresident individual, adjusted for modifications under § 612(b), (c), and (k)
• Tax Law § 631(a)(2) - inclusion of the New York source portion of § 612(b)/(c) modifications
• Tax Law § 632 - nonresident partner's distributive share of partnership income, gain, loss, and deduction
• Tax Law § 612(b)(8) - required add-back of federal bonus depreciation claimed on IRC § 168(k)(2) property
• Tax Law § 612(c)(16) - subtraction modification for IRC § 168(k)(2) property
• Tax Law § 612(k) - subtraction computed under the pre-bonus-depreciation IRC § 167 schedule

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a11_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-11(6)I
Income Tax
September 22, 2011

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

PETITION NO. I110623A

The Department of Taxation and Finance received a Petition for Advisory Opinion from name
and address redacted. Petitioner is a nonresident of New York with investments in real estate through
partnerships that had New York State source passive activity losses in 2010. As a result of the losses,
Petitioner had zero federal adjusted gross income (FAGI). A federal bonus depreciation deduction tied
to the losses was subject to an add back on her New York State return. Another New York State
modification allowed her to subtract a depreciation deduction, based on those same losses but
calculated under a federal law preceding adoption of the bonus depreciation deduction. As a result,
Petitioner owed New York State income tax for 2010. Petitioner asks whether she may claim an
additional passive activity loss equal to the New York adjustments in either the Federal or New York
State column for tax year 2010. She further asks if she should be subject to New York income tax on a
real estate activity conducted through a partnership which has a significant economic loss exceeding
the New York adjustments.
We conclude that there is no provision under the Tax Law that would allow Petitioner to claim
on the New York State income tax return an additional passive activity loss equal to the New York
adjustments. The fact that Petitioner owed 2010 New York State income tax is not changed, even
though the partnership in which she was a partner had significant economic losses exceeding her
New York State adjustment.
Facts
Petitioner is a nonresident of New York State. Her New York source income for tax year 2010
was derived from an investment in real estate through partnerships that had significant economic
losses. For federal income tax purposes, the losses, characterized as Internal Revenue Code (IRC)
§168(k)(2) losses,1 were treated as passive activity losses, limited for federal purposes to the amount of
passive activity income. The partnership claimed a deduction for an accelerated method of bonus
depreciation, which produced a federal adjusted gross income (FAGI) of zero. For New York State
income tax purposes, the bonus depreciation deduction was subject to an addition modification and to a
smaller subtraction modification. These modifications, in combination with the loss limitations at the
federal level, resulted in Petitioner’s owing New York State income tax, despite the zero FAGI.
Analysis
Petitioner first asks whether she may claim an additional passive activity loss equal to the
New York adjustments in either the Federal column or the New York State column. The New York
1

In a telephone conversation on July 25, 2011, Petitioner’s representative confirmed that these losses were treated as IRC
§168(k)(2) losses for federal income tax purposes.

-2-

TSB-A-11(6)I
Income Tax
September 22, 2011

source income of a nonresident individual means his FAGI derived from New York State sources,
including his distributive share of a partnership income, gain, loss and deduction.2 The income is then
adjusted for the individual’s New York State source portion of modifications described in Tax Law
§612(b), (c), and (k).3
Under Tax Law §612(b)(8), the amount of the federal bonus depreciation deduction, allowed
on IRC §168(k)(2) property and claimed on the federal return, must be added back on the New York
State return.4 The Tax Law also provides for a subtraction modification for a depreciation deduction
claimed on IRC §168(k)(2) property,5 but this deduction is not based on the bonus depreciation
deduction schedule in IRC §168(k)(2). Instead, the subtraction modification is based on the
depreciation allowance under IRC §167 as the section would have applied to the property had it been
acquired by the taxpayer on September 10, 2001 - prior to adoption of the bonus depreciation
deduction.6 There is no provision in the Tax Law under which Petitioner can claim an additional
passive activity loss equal to the New York adjustments on the New York State income tax return.
Thus, Petitioner may not claim an additional passive activity loss equal to the New York adjustments.
Lastly, Petitioner asked if she should be subject to New York income tax on a real estate
activity conducted through a partnership which has a significant economic loss exceeding the
New York adjustments. A partner in a partnership that has New York source income is subject to
New York State income tax under the requirements of the Tax Law. Because Petitioner, after applying
the modifications in the Tax Law to her FAGI, had New York source income, she is subject to
New York State income tax.

DATED: September 22, 2011

NOTE:

2

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 Laws §631(a); §632.
Tax Law §631(a)(2).
4
Tax Law §612(b)(8).
5
Tax Law §612(c)(16) and §612(k).
6
Tax Law §612(k).
3

/S/
DEBORAH R. LIEBMAN
Deputy Counsel