New York City’s Attempt to Disallow Business Expense Deduction Rejected

The New York City Tax Tribunal concluded that the Department of Finance (“Department”) could not disallow an interest expense deduction that was allowed for federal income tax purposes. In its opinion, the Tribunal rejected the argument that the statute has two independent tests for deductibility and concluded that the intent of the Legislature was to conform the city’s unincorporated business tax (UBT) to federal law. See, In the Matter of A&E Television Networks, New York City Tax Appeals Tribunal, No. TAT(E) 20-32(UB), November 19, 2025.

Under N.Y.C. Admin. Code § 11-507, deductions of an unincorporated business are “the items of loss and deduction directly connected with or incurred in the conduct of the business, which are allowable for federal income tax purposes for the taxable year…” subject to modifications.

The taxpayer claimed an interest expense deduction for amounts related to the redemption of the equity of one of its partners. This deduction was allowed by the Internal Revenue Service (IRS) for federal income tax purposes. On audit, the Department disallowed 94% of the deduction, arguing that it was not directly tied to the business. The Department argued that for a deduction to be allowable under UBT § 11-507, it had to satisfy two separate tests: 1) the deduction must be allowed for federal income tax purposes and 2) it had to be directly connected with or incurred in the conduct of the business. The Tribunal rejected the Department’s two-test argument.

The Tribunal found it hard “to fathom” how an expense can satisfy the federal definition of a deductible business expense but fail to satisfy the directly connected language in the UBT statute. The Department’s argument would nullify the Legislature’s federal conformity mandate. The Tribunal noted that much of the debate focused on the location of the comma before the phrase “which are allowable for federal income tax purposes” and that somehow this created two separate tests. Citing precedent, the Tribunal noted that words, not punctuation, should guide statutory construction. Notably, the Tribunal, citing the New York Court of Appeals, said the primary objective should be to give effect to legislative intent. The only reasonable interpretation of the statute is that the UBT be based on the same business income and deductions used for federal income tax purposes.

Ryan’s Take and Action Steps

The Tribunal noted that more than 30 years ago, the New York State Tax Appeals Tribunal rejected an identical issue, where the taxpayers were the New York Yankees. Given that precedent, and the administrative law judge’s rejection of the Department’s arguments, one has to wonder why the Department appealed to the Tribunal.

The case was notable for its detailed examination of the structure of the deduction―with much ink given to the placement of a comma. UBT taxpayers should carefully read the statute before taking a deduction or review situations where a deduction has been adjusted or denied, especially where it was allowed federally.

For questions regarding the New York UBT, please contact the Ryan tax specialists below.

TECHNICAL INFORMATION CONTACTS:

Glenn McCoy
Principal
Ryan
212.871.3901
glenn.mccoy@ryan.com

Argi O’Leary
Principal
Ryan
212.871.3901
argi.oleary@ryan.com

Adam Weinreb
Director
Ryan
917.472.9420
adam.weinreb@ryan.com

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