United States

New York City small businesses to receive Commercial Rent Tax benefits

TAX ALERT  | 

On Dec. 22, 2017, Mayor Bill de Blasio signed Int. Nos. 799-B and 1783 (Local Laws 254 and 256, respectively), providing for modifications to the New York City Commercial Rent Tax (CRT) benefiting businesses with incomes under $10 million per year and that pay less than $550,000 in a yearly base rent.

CRT background and current exemption thresholds

The CRT is imposed on tenants who occupy or use a property for commercial activity in Manhattan, south of 96th Street, whose gross rent totals at least $250,000 annually. The CRT also provides a number of limited exemptions for short rental periods, residential subtenants, theatrical productions and not-for-profit entities, among others.

The tax is imposed at the rate of six percent of the base rent. All taxpayers are granted a 35 percent base rent reduction exemption, which reduces the effective tax rate to 3.9 percent. Base rent also includes property taxes and utilities that are not separately metered. A credit is available for rents between $250,000 and $300,000. The CRT is assessed annually, but quarterly returns are generally required.

CRT exemption threshold changes for small businesses

The new law modifies the definition of “base rent” to instead use the term “small business tax credit base rent” in order to clarify that the CRT credit is calculated differently than the base rent for the CRT.

Beginning July 1, 2018, renters subject to the CRT who have a base rent under $500,000 and an income less than $5 million would be exempt from the CRT. This is an increase in the current exemption threshold of $250,000. The legislation also provides partial credits to renters with a base rent between $500,000 and $550,000 and incomes between $5 million and $10 million. Finally, renters with incomes over $10 million or a base rent over $550,000 would not receive any credit benefits.

Takeaways

The CRT is often overlooked by commercial taxpayers who rent space in Manhattan. In recent years, the New York City Department of Finance has increased enforcement of the tax, resulting in an increase of significant assessments of tax, interest and penalties on those failing to comply. If no CRT return has been filed, there may not be a statute of limitations on the audit of the tax. In that scenario, audits may commence from when a lease was originated.

Taxpayers with questions about the CRT should consider speaking to their tax advisers. Taxpayers subject to the CRT that have never filed a return should consider several options for exposure mitigation.

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