A new law, passed by the New York City Council on November 30, 2017, made significant changes to the New York City Commercial Rent Tax (CRT). It is important for CPAs to understand how this new law will affect small business owners located in New York City in order to assist them with their CRT obligations.
The CRT was first levied in 1963. In fiscal year 2015, the tax collected amounted to $719,960,000, representing 0.9% of the city’s total revenue (Statistical Profile of the New York City Commercial Rent Tax, Tax Year 2015, City of New York Department of Finance Office of Tax Policy, http://on.nyc.gov/2srrG8q). Currently, the CRT is imposed on tenants who occupy or use property for commercial activity between 96th St. and Murray St. in lower Manhattan with an annualized base rent of $250,000 or more. The current effective tax rate is 3.9%.
Changes under the New Law
The new CRT provision, New York City Administrative Code section 11-704.4, will become effective on July 1, 2018. Under this section, a credit is provided that results in the annualized base rent not subject to tax being increased from $250,000 to $500,000 for businesses with no more than $5 million of total income for premises between 96th St. and Murray St. that are used for commercial activities. In addition, where the annualized base rent is between $500,000 and $550,000, there is a credit applied to the next $50,000 of annualized base rent. The effective tax rate remains unchanged.
In order to determine the total credit where the annualized base rent is between $500,000 and $550,000, the CRT imposed on the tenant, minus any allowable credits or exemptions otherwise applicable, is multiplied by an income factor and a rent factor. For this purpose, the income factor for a tenant with total income of $5 million or less is one. The rent factor for a tenant whose base rent is at least $500,000, but not more than $550,000, is a fraction, the numerator of which is $550,000 minus the base rent and the denominator of which is $50,000.
Similarly, to determine the credit where the tenant has total income between $5 million and $10 million, the CRT imposed on the tenant is also multiplied by the income factor and the rent factor. Here, however, the income factor is a fraction, the numerator of which is $10 million minus the amount of total income, and the denominator of which is $5 million. If the base rent is $500,000, the rent factor is one, and if the base rent is between $500,000 and $550,000, the rent factor is as in the above paragraph.
Regarding the $5 million and $10 million thresholds, the definition of total income starts with gross receipts, or sales of the business, minus returns and allowances and cost of goods sold. It includes most types of income or loss reflected on the business’s federal income tax return, including dividends, interest, gross rents, gross 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.
As indicated above, small businesses with total income of not more than $5 million, and which pay no more than $500,000 in rent per year, will receive a full CRT exemption. If the base rent is between $500,000 and $550,000, a partial credit is available with respect to the amount of the base rent over $500,000. In addition, businesses that earn more than $5 million of total income, but less than $10 million, and which pay between $250,000 and $500,000 in annual rent, will receive a partial CRT credit. Businesses that generate more than $10 million in total income do not qualify for any tax credit, and thus will pay the full CRT.
It should also be noted that the Department of Finance is currently discussing how the income of entities with common ownership would be combined for purposes of the $5 million and $10 million thresholds. It is not known how this issue will be resolved.
Effects on Small Business Owners
Given the stiff competition from e-commerce businesses, increasing the amount of base rent that is not subject to the CRT is necessary to help keep small businesses in New York City from going out of business. Startups, closely held family businesses, and small businesses that serve local needs will receive the most benefits from the new tax law. This law will bring tax relief for about 2,700 business owners, with approximately 1,800 of them receiving a full CRT exemption.
It is important to note that, although the change in the CRT discussed above has already been enacted, no rules or regulations have been adopted, or proposed, that would provide guidance as to how the provision will be interpreted by the New York City Department of Finance. This column will provide updates as soon as this is clarified.