Changes to the New York City Commercial Rent Tax Offers Tax Relief for Small Businesses

Synopsis

On November 30, 2017, the New York City Council passed a bill increasing the rent threshold subject to the New York City Department of Finance’s Commercial Rent Tax from $250,000 to $500,000.

Background

The New York City Commercial Rent Tax (CRT) is a 6% tax imposed on the rent paid by tenants who occupy or use a property, for commercial purposes, located in Manhattan south of 96th Street.

Currently, businesses that pay less than $250,000 in annual rent are exempt from the city’s commercial rent tax. However, if the gross rent paid is between $200,000 and $250,000, a commercial rent tax filing is required.

The legislation increases the exemption threshold from $250,000 to $500,000 for qualifying businesses. The tax relief will be in the form of a tax credit.

Implementation

Businesses with annual rents below $500,000 and total incomes of not more than $5 million will be entitled to a full tax credit.

A partial tax credit will be available to businesses with:

• Total incomes of $5 million or less and annual rents between $500,000 and $550,000
• Total incomes between $5 million and $10 million who pay less than $550,000 in annual rent. 

Businesses with total incomes of more than $10 million would be subject to the existing commercial rent threshold of $250,000.

Under the proposal, total income is defined as “[g]ross receipts or sales of the person minus any returns and allowances, minus the cost of goods plus the amount of any dividends, interest, gross rents, gross royalties, capital gain net income, net gain or loss from the sale of business property, net farm profit or loss, ordinary income or loss from other partnerships, estates, or trusts or other income or loss”.

For purposes of this tax credit, total income is determined in the tax year immediately preceding the period for which the tax credit is being claimed. 

Effective Date

The CRT change takes effect on July 1, 2018.

What Does CohnReznick Think?

Taxpayers should be aware that the higher exemption threshold does not impact CRT filing requirements. Taxpayers with annual rent of more than $200,000, or a subtenant deduction of more than $200,000, are still required to file a CRT return.

In addition, the tax credit for businesses with annual rents between $250,000 and $300,000 will remain in place, regardless of total income. Moreover, while the proposed changes are anticipated to impact small businesses, all businesses occupying commercial premises within Manhattan should review their CRT compliance obligations. 

Contact

For more information, please contact Corey Rosenthal, JD, Principal, who leads the Firm’s State and Local Tax Practice in New York, at [email protected] or 646-625-5729, or John Morhart, Director, at [email protected] or 646-762-3460.  

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