Recent New York City Commercial Rent Tax Amendment May Add Tax Credit for Small Businesses
Recently, the New York City Commercial Rent Tax (CRT) law was amended to add a new tax credit for certain small businesses. This new section provides both rules and guidance on how to compute the new tax credit.
Under prior law, the CRT was imposed on New York City tenants who occupy or use a property for commercial purposes if the property is in Manhattan south of 96th Street. The tax was applied at an effective rate of 3.9%. Under the new provision, if the business meets certain requirements (specifically, annual rent below $500,000 and total income of not more than $5,000,000), in effect the business will be exempt from the CRT because it will be entitled to a tax credit equal to the full amount of its pre-credit CRT. In other instances, a tenant can qualify for a partial tax credit.
To determine the amount of the CRT credit that a small business is entitled to, an income factor and a rent factor must be calculated. With respect to the income factor, if the income of the business is not more than $5,000,000, the income factor is one. For a business with total income between $5,000,001 and $10,000,000, the income factor is determined by multiplying the income by a fraction. The numerator of which is $10,000,000 minus total income. The denominator of which is $5,000,000.
Where the income exceeds $10,000,000, the income factor is zero.
For the rent factor, where the business has a credit tax base rent (as defined) of less than $500,000, the rent factor is one. Where such base rent is between $500,000 and $550,000, the rent factor is determined by a fraction. The numerator of which is $550,000 minus the credit base rent, and the denominator of which is $50,000.
A business with income exceeding $10,000,000 or base rent exceeding $550,000 is not entitled to a credit under the new section.
For purposes of the calculation, “income” is defined as gross receipts or sales reported to the Internal Revenue Service for the year immediately preceding the year for which the business will claim the credit, less returns and allowances and cost of goods sold. Added to the foregoing are various types of income including dividends, interest, gross rents and royalties, capital gain net income, net gain or loss from the sale of business property, and ordinary income or loss from partnerships, estates and trusts.
In addition, if the tenant is a limited liability company or other business entity that is not separate from its owner for federal income tax purposes, the income factor is based on the income of the entity that reports the activities of the limited liability company or other business entity.
Although total income is based on income from the immediately preceding year, base rent is current year base rent. For purposes of the CRT credit, “tax credit base rent” is the base rent calculated without regard to the reduction to base rent permitted by New York City Administrative Code §11-704(h), e.g., 35%.
Once the income factor and the rent factor have been calculated, the amount of the tax credit is determined by multiplying the CRT due under New York City Administrative Code §11-702, less any other allowable credits or exemptions, by the income factor and the rent factor.
It should be noted that the general CRT filing requirements have not changed, and therefore, if a business pays an annual gross rent of $200,000 or more and/or if rent of $200,000 or more is received from any subtenant of the premises, CRT returns must be filed. The tax credit for businesses with annual rents between $250,000 and $300,000 will remain in place, regardless of total income.
When the amendment providing for the new tax credit was adopted, the effective date was July 1, 2018. However, the tax year for CRT purposes commences June 1, 2018. Thus, an issue existed as to how the month of June 2018 would be dealt with. In this regard, the Department has not provided a definitive response with regards to the effective date but a senior level official in the Department did mention that most likely it will start from June 1, 2018.
What does CohnReznick Think?
The new CRT credit for small businesses has several complex elements. Presumably, the New York City Department of Finance will adopt regulations that will, among other things, clarify these complex areas.
For more information regarding the new credit for small businesses and the CRT generally, please contact Corey Rosenthal at 646-625-5729, Annie Yang at 646-601-7884, or John Morhart at 646-762-3460.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.