In response to the COVID-19 pandemic, both federal and state legislatures passed a series of legislation to inject funding into the economy and sought specifically to tailor programs to support small businesses within the United States. With the enactment of the COVID-19 Capital Costs Tax Credit Program, New York seeks to “provide financial assistance to economically harmed businesses to offer relief and reduce the duration and severity of the current economic difficulties” stemming from the pandemic.[1]

New York is currently accepting small business applications through March 2023, assuming the program funds have not been expended by then, for its COVID-19 Capital Costs Tax Credit Program.[2] The program aims to provide financial assistance to small businesses operating within New York if they invested in structural upgrades, changes, or supplies to continue operations during the pandemic.[3]

Small businesses may receive a tax credit of 50% for any “qualified costs” incurred between January 1, 2021, and December 31, 2022, and “paid for on or before March 31, 2023.”[4] The amount of the credit that can be claimed by the business entity cannot exceed $25,000 or be less than $1,000.[5] Businesses seeking to obtain the tax credit for the 2022 tax year must have obtained a tax credit certificate[6] by no later than December 31, 2022. Tax certificates received after December 31, 2022, will allow businesses to apply the credit to their 2023 New York income tax returns.

Eligibility Requirements

The regulations state which businesses are eligible to take the COVID-19 Capital Costs Tax Credit under Sec. 290.5(a)(1)-(3). Authorized applicants[7] must:

• Be a small business in New York State and have $2.5 million or less of gross receipts for the taxable year that includes December 31, 2021
• Operate a business location within New York State
• Have at least $2,000 in “Qualified COVID-19 capital costs.”

To qualify as a small business, the business must be “a resident of [the state of New York], independently owned and operated, not dominant in its field, and employs 100 or fewer persons.”[8] For a small business to be independently owned, it must independently manage and control the day-to-day operations of the business entity, and not be an entity that is publicly traded or that is owned directly or indirectly by a publicly traded company.[9]

Qualified COVID-19 capital costs include, but are not limited to, costs paid or incurred to purchase, install, erect, or restock items to comply with public health orders or regulations; and to mitigate the spread of infectious diseases, especially COVID-19.[10] All costs must be incurred between January 1, 2021 through December 31, 2022, unless the costs were incurred between January 1, 2021 and April 1, 2021, and were paid for from proceeds of the New York State COVID-19 Pandemic Small Business Recovery Grant Program, at a business location in New York that is in compliance “with public health or other emergency orders or regulations related to the COVID-19 pandemic, or to generally increase safety through infectious disease mitigation.”[11] 

The applicant must also not owe any past due “state taxes or local property taxes,” unless there is a binding agreement between the business and taxing authority and the entity is up to date in making payments in conformity with that agreement.[12]

Former New York state senator Anna Kaplan was one of the credit’s most vocal supporters.[13] The authors inquired of Kaplan’s office in August 2022 to gain further insight into the credit’s eligibility requirements and intent. According to Joseph Erdman, legislative director for Kaplan, not-for-profit organizations, unlike other business entities discussed under Sec. 290.2(b),[14] are ineligible for the tax credit. The rationale for the omission, per Mr. Erdman, stems from the estimated increase in cost of including not-for-profit organizations and the access such organizations have to additional resources provided by the State.[15]

Applying for the Credit

The final regulations for the tax credit place the burden of review and approval for potential applicants with the New York Department of Economic Development[16] and the Department has delegated this task to Empire State Development (ESD). Businesses seeking to obtain the credit must first complete a screening process available via the ESD website before applying for the credit.[17]

The screening process is administered via an online portal setup by ESD.[18] Authorized applicants must submit their contact information, including the applicant’s full name, phone number and email address.

Information about the applicant’s business is also required including its name, address, federal identification number, and which New York county it is located in.

Further, ESD requests:

• the date of establishment for the business
• the 2021 NAICS Code from the 2021 tax return of the business
• the business’ 2021 gross receipts
• the number of employees of the business
• whether it is a minority- and women-owned business enterprise (MWBE) or veteran-owned.

The portal then requests that the applicant provide a preliminary estimate of its qualified business expenses falling into 13 categories described by ESD within the screening process. ESD requests only preliminary estimates as it will require the applicant to provide actual expenses and documentation “at a later time.” The portal notes, however, that expenditures do not qualify that were paid for using proceeds from the New York State COVID-19 Pandemic Small Business Recovery Grant Program.[19]

Upon completion of the estimates, the applicant is then required to attest to each of the following:

• The business is operating in New York at the time of application;
• It is incorporated or registered to do business in New York; 
• It is in compliance with applicable federal, state, and local laws, codes, regulations, and requirements; 
• It does not owe past due taxes unless it is making payments and complying with an approved binding agreement with the appropriate taxing authority; 
• That a public entity does not own more than 5% of the business, directly or indirectly; 
• It agrees to allow the department of taxation and finance to share its tax information with the Department of Economic Development (though it will not be subject to disclosure or inspection under the state freedom of information law); and  
• It agrees to provide any additional information required by the Department.

Upon completion of the screening process, the applicant will be informed whether they may qualify for the credit. Applicants are then advised to expect to receive communication from the contracted administer of the application process, FORWARD, within five business days and to provide “supporting documentation for any claimed expenditures over $1,000, along with a sample of supporting documentation for expenditures under $1,000.[20]

According to ESD’s website, the documentation required may be “receipts or other evidence that a qualifying expense was incurred between January 1, 2021, and December 31, 2022, and paid for on or before March 31, 2023.”[21] Applicants are encouraged to begin compiling supporting evidence for costs already incurred once they decide to begin the process. The regulations stipulate that applications shall not be approved if the applicant does not agree to allow the Department to communicate information and receive records from the Department of Taxation and Finance as well as the Department of Labor regarding the business’ tax and employment information.[22] Similarly, the applicant must allow the Department of Economic Development access to the business’ books and records that may be required to monitor compliance.[23]

Potential Pitfalls to Implementation

Applicants for the credit are required to exclude from qualified expenditures any expenditures paid for with proceeds from the New York State COVID-19 Pandemic Small Business Recovery Grant Program.[24] However, information about the mechanisms for detecting “double-dipping” from the COVID relief program has not been released. In contrast, the grant program boasts a “robust anti-fraud methodology to protect State funds and the integrity of the Program.”[25] In the aftermath of federally subsidized relief programs, numerous reports of fraud, waste, and abuse have been reported because of falsely prepared applications to receive funds.[26]

Without a verification process to ensure an applicants’ expenses were not paid for with COVID-19 Recovery Grant money, ESD essentially would be relying on the honor system. Although one could argue that the State has the ability to verify applicants’ assertions on the backend of the tax credit process, the seemingly unrelenting amount of fraud uncovered within federal pandemic programs provides a cautionary tale.[27] For programs including the Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL), programs designed to get money to businesses quickly and with little screening, the honor system also became the “check” on whether or not applicants truly qualified for relief. Prosecutors in cases dealing with these COVID relief programs have charged hundreds with fraud, and still believe they are just the tip of the iceberg.[28]

Another potential pitfall to meeting the stated intent of the tax credit comes in the form of inequities that exist among different small business’ accounting functions. Businesses that employ or contract full-time accountants and financial advisors could be at an advantage, both in awareness of the program as well as the ability to complete an acceptable application, in a timely manner. Relatedly, there may be concern for businesses that were unaware of the development of the tax credit program and, as a result, failed to maintain an effective receipt retention policy. Per our discussion with Kaplan’s office, this disadvantage ought to be mitigated with greater distribution of information about the credit by ESD and FORWARD, and small business’ access to New York Small Business Development Centers which may assist applicants with submitting accurate information to ESD.[29] Additionally, believing that the New York Chamber of Commerce has the biggest role to play in disseminating information, Kaplan’s office looks to the chamber to increase awareness.[30]

The most noticeable potential pitfall for the tax credit program is its potential shortfall in funding. With an estimated 350,000 businesses potentially eligible to qualify for participation in the program,[31] technically, if all of these businesses did qualify for the credit, there might not be enough funding for each applicant even if each business were to seek a credit of just $1,000, the minimum allowed. More problematic is the scenario in which the $250 million budget is allocated to a small group of businesses claiming amounts at or near the maximum credit allowed, $25,000. When asked about this potential shortfall, Erdman countered that they expect the credits will go to many small businesses for small amounts, and that they do not anticipate many businesses qualifying for amounts near the maximum that can be awarded. Furthermore, Mr. Erdman stated that the funding is pulled from the New York general fund, and more could be allocated if funds were depleted.[32]

Pathway to Implementation

As previously mentioned, ESD, under the Department of Economic Development has awarded the winning bid to FORWARD to create and administer the application process for the tax credit. FORWARD is responsible for “[screening] applications, [validating] expenses, and [distributing] credits for the program.”[33] The Department of Taxation and Finance has been tapped to develop tax compliance mechanisms for the credit.[34] Undoubtedly, the relief will be welcomed by many small business owners still reeling from the effects of the pandemic. 

If you believe you qualify for this credit, consult a tax advisor, as soon as possible, to help you navigate the application process for your small business. Time is quickly running out, assuming New York does not extend the filing deadline. 

Marquise Riley, CPA, MPS, is a Lecturer in the Dyson School of Applied Economics and Management under the SC Johnson College of Business at Cornell University. He can be reached by e-mail at msr259@cornell.edu.

John McKinley, CPA, CGMA, JD, LLM, is a Professor of Practice in the Dyson School of Applied Economics and Management under the SC Johnson College of Business at Cornell University. He can be reached by e-mail at jwm336@cornell.edu.

Adam Vars, MPS,obtained his Master of Professional Studies concentrating in Accounting from the SC Johnson College of Business at Cornell University in May 2022. He can be reached by e-mail at av373@cornell.edu