CPAs need to be aware of certain changes that affect the New York City Department of Finance’s (DOF) administration of its commercial rent tax (CRT law). This article will provide CPAs with the key revisions that they need to know so that they can properly assess their respective clients commercial rent tax eligibility, filing and remittance obligations.
The DOF administers the Small Business Tax Credit under section 11-704.4 of the New York City Administrative Code. This section provides details and guidance on how to compute this new tax credit, which small businesses can deduct on their commercial rent tax return starting from July 1, 2018.
Under the current CRT, tenants who occupy or use for commercial purposes a property located south of 96th Street in Manhattan are imposed a commercial rent tax at an effective rate of 3.9%. The new law will allow businesses with annual rents below $500,000 and total incomes of not more than $5 million to be exempt from the CRT; the tax relief will come in the form of a small business tax credit. In addition, a partial tax credit will be available to the following eligible businesses:
- Businesses with total income of $5 million or less who pay between $500,000 and $550,000 in annual rent
- Businesses with total income of more than $5 million and less than or equal to $10 million who pay less than $550,000 in annual rent.
The tax credit is computed based on income and rent; as per the DOF’s regulations, income is defined as total income less cost of goods sold and return and allowances. This means all income, including income from intangibles and/or pass-through entities, is included in the computation to determine the income thresholds.
The method to compute the income factor is as follows:
- If total income is not more than $5 million dollars, the income factor is 1.
- If the total income is at least $5 million but less than or equal to $10 million, the formula to compute the credit is $10 million minus the amount of total income, divided by $5 million.
The method to compute the rent factor is as follows:
- If the base rent is less than $500,000, the rent factor is 1.
- If the base rent is at least $500,000 but less than or equal to $550,000, the formula to compute the credit is $550,000 minus the base rent, divided by $50,000.
Limitations
Businesses that do not meet the criteria above may not claim a credit under this section and are required to file or remit commercial rent tax returns based on the DOF’s previous administered laws and regulations. It should be emphasized that the filing requirement has not changed; therefore, if a business has an annual gross rent of $200,000 or more, or if the rent received from any subtenant of the premises is $200,000 or more, there is still a commercial rent tax filing requirement.
Other Important Highlights
CPAs should be aware that the income factor is based on the tax year immediately preceding the period for which the tax credit is being claimed, but the rent factor is based on current year’s base rent. In addition, if the entity that has the commercial rent tax filing or remittance obligation is a limited liability company 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. Furthermore, the tax credit for businesses with annual rents between $250,000 and $300,000 will remain in place, regardless of total income.
While the proposed changes are anticipated to affect mostly small businesses, all businesses occupying commercial premises within Manhattan should review their CRT compliance obligations to determine how these new revisions affect them.
