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New York State & Local Tax Update: January 2018

Posted 5:00 AM by

Small businesses renting commercial property in downtown Manhattan are getting a break on their Commercial Rent Tax (CRT) under new legislation signed by Mayor Bill de Blasio in late December. Effective for tax years after July 1, 2018, the law provides a new tax credit for businesses that have income of less than $10 million and rent of less than $550,000.

Existing Law

Generally, under the existing CRT law, tenants are required to pay tax on base rent paid for the occupation or use – or intended occupation or use – of carrying on a trade or business at each commercial taxable premises within a certain area of Manhattan. The tax rate ranges from two percent to six percent. If rent is not paid for a full year, then rent is annualized to calculate the tax. There are exemptions for certain types of taxpayers such as the United States, state of New York, and political subdivisions of New York; the United Nations and other international organizations of which the United States is a member; nonprofit organizations operated for religious, charitable, or educational purposes; and tenants of the World Trade Center area.

Additionally, a taxpayer whose base rent, before the general 35 percent rent reduction, does not exceed $249,999 is not subject to tax. A tenant with base rent of $250,000 but not more than $300,000 is allowed a credit, which is calculated on a sliding scale based on how much base rent exceeds $250,000.

New Law

The new law creates a new code section that allows for an additional credit against CRT for small businesses for tax years beginning after July 1, 2018. Since the CRT tax year is June 1 to May 31, the first full tax year that the ordinance would be effective for most taxpayers is the tax year beginning June 1, 2019. However, if you have a partial tax year that begins on or after July 1, 2018, the credit would be applicable. Under the new small business credit, tenants with base rent of at least $250,000 but not more than $550,000 are eligible for a credit against tax. The credit is calculated by multiplying the amount of tax (less any other allowable credits) by the income factor and the rent factor.

The income factor and rent factors are determined based on the tenant’s amount of total income and base rent, respectively. Total income for a tenant is the amount of income reported to the IRS for the immediately preceding tax period (i.e., federal income as of year-end Dec. 31, 2019, would be used to determine total income for the CRT period year-end of May 31, 2020). Total income includes gross receipts or sales less any returns or allowances and less cost of goods sold, dividends, interest, gross rents, gross royalties, net capital gain, net gain or loss from sales of business property, net farm profit or loss, ordinary income or loss from other pass-through entities, estates or trusts, and any other income or loss items.

Calculation of Income and Rent Factors

The income factor is calculated as follows:

  • If total income is $5 million or less, the income factor equals one.
  • If total income is greater than $5 million but not greater than $10 million, the income factor equals the difference of $10 million minus total income divided by $5 million.
  • If total income is greater than $10 million, the income factor equals zero.

The rent factor is calculated as follows:

  • If base rent is less than $500,000, the rent factor equals one.
  • If base rent is at least $500,000 but not greater than $550,000, the rent factor equals the difference of $550,000 minus base rent divided by $50,000.

This new law expands the allowance of a credit against CRT to taxpayers with rent up to $550,000 and who do not have total income greater than $10 million. Taxpayers who previously were afforded an exemption under NYC Admin. Code 11-704 or a credit under NYC Admin. Code 11-704.3(a)(6) are still afforded these exemptions and credits and can further reduce their tax liability by this small business credit. According to the New York City Office of the Mayor, approximately 2,700 businesses will see a reduction in taxes, which includes 1,800 businesses that will no longer pay any tax. 

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.

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