New York City Enacts Small Business Credit for Commercial Rent Tax
March 6, 2018
Credit provides Commercial Rent Tax relief to small businesses and is effective beginning June 1, 2018.
When taxpayers and practitioners consider state and local tax issues, sometime the “local” in “state and local” does not get enough attention. We understand that it is difficult enough to try and remain in compliance with the fifty states. When you throw in thousands of local jurisdictions, the analysis can be daunting. In addition, it is often difficult to find sufficient information on local taxes since municipal codes and ordinances are not always readily available.
Nonetheless, failure to identify and comply with local taxes can give rise to significant exposure if the noncompliance extends for a lengthy period of time. One such local tax that we see taxpayers overlook from time to time is New York City’s Commercial Rent Tax (“CRT”). This article provides a high level summary of the tax and explains a recent tax credit that was enacted to provide CRT relief for small businesses and is effective beginning June 1, 2018.1
The CRT is imposed at the rate of 6% of base rent2 paid by any tenant for space used in carrying on any trade, business, or commercial activity.3 The tenant pays the tax and files the required quarterly tax return – landlords do not collect and remit the tax on behalf of the tenant. The tax applies only to locations that are in the Borough of Manhattan and south of the center line of 96th Street.4 There are also exemptions for certain uses in the southern part of Manhattan south of Murray Street as well as the designated “World Trade Center Area.”5 Additionally, tenants are permitted a deduction equal to 35% of base rent (i.e., paying tax on 65% of base rent and making the effective CRT rate 3.9%) and any tenant whose annualized base rent is less than $250,000 (before the 35% deduction) is exempt from the tax.6
Currently, tenants whose base rent is between $250,000 and $300,000 are allowed a credit equal to 3.9% of base rent times a fraction, the numerator of which is $300,000 minus the base rent and the denominator is $50,000.7 For example if base rent is $280,000, the tax would be $10,920 ($280,000 x 65% x 6%). The credit equals $4,368 ($280,000 x 3.9% x ((300,000-280,000)/50,000)). So, the total tax liability is $6,552.
As of June 1, 2018, New York City is offering a small business credit against this tax.8 In order to qualify, tenants must pay annual gross rent of at least $250,000 and less than $550,000. The credit is calculated by multiplying the tenant’s CRT liability (after other credits are applied) by an income factor and a rent factor. The income factor is one if a tenant has a total income of $5 million or less, and is zero if the tenant has total income of at least $10 million. If the tenant has
income in between, the factor is a fraction, the numerator of which is $10 million minus the tenant’s total income and the denominator of which is $5 million. For purposes of this computation, “total income” is essentially the same as Line 8 of the Federal Form 1065 (for partnerships) and Line 11 of Federal Form 1120 (for corporations) for the tax year immediately preceding the period for which the tenant is applying the credit.
The rent factor is one if a tenant’s base rent is no more than $500,000. If a tenant’s base rent is more than $500,000 but less than $550,000, the rent factor is a fraction, the numerator of which is $550,000 less the base rent amount and the denominator of which is $50,000. Ultimately, tenants with at least $550,000 of base rent or at least $10 million of total income will not receive a credit because either the rent factor or the income factor will be zero. On the other hand, tenants with $500,000 or less of base rent and $5 million or less in total income will receive a full credit and no longer pay the CRT.
Based on the example above, if the tenant had total income of $4 million, the tenant’s income factor and base factor are each one, so the small business credit would equal $6,552 ($6,552 x 1 x 1), and the overall CRT liability would be zero. If the tenant’s total income is $8 million, then the rent factor is still one and the income factor is .4 (($10M-$8M)/$5M). Therefore, the credit equals $2,620 ($6,552 x 1 x .4) and to CRT liability is $3,932.
Taking another example, assume a tenant has $510,000 of base rent and total income of $9 million. The CRT liability before application of the credit would be $19,890 ($510,000 x 65% x 6%). Since the tenant’s base rent is above $300,000, it is not eligible for the first credit described above. For purposes of the new small business credit, the rent factor is .8 (($550,000-$510,000)/$50,000) and the income factor is .2 (($10M-$9M)/$5M). The credit amount equals $3,182.40 ($19,890 x .8 x .2), and the net CRT liability equals $16,707.60.
Similar to sales tax liability, noncompliance with the CRT can result in significant exposure in a short period of time. This new credit will provide some CRT relief to small businesses that pay less than $550,000 in rent. Aprio’s SALT group can assist businesses understand any local tax obligations that may exist in order to ensure that such business do not generate unexpected tax exposure. We constantly monitor these and other important state and local tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the February 2018 SALT Newsletter.
1 The credit was originally effective on July 1, 2018, but was subsequently amended to make the effective date June 1, 2018, to match the CRT’s filing period. See L.L. 121 (No. 882), enacted 6/23/18.
2 Base rent is generally the amount of gross rent paid less amounts received from a subtenant.
3 NYC Admin Code 11-702.
4 NYC Admin Code 11-704(h)(1).
5 NYC Admin Code 11-704(a)(6) and (c)(9).
6 NYC Admin Code 11-704(b)(2)(x) and (h)(2). Generally, a return is still required to be filed if rents paid are in excess of $200,000.
7 NYC Admin Code 11-704.3(a)(6).
8 NYC Admin Code 11-704.4.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.