An Overview Of The NYC Business Tax Environment
March 27, 2017
NYC Never Sleeps – But It Does Tax
“If I can make it there, I’ll make it anywhere.” So begins one of the most iconic of musical tributes to New York City. It is sung at every Yankees game. It sums up the feelings of thousands of aspiring artists. As it turns, out, however, it also captures the reaction of many closely-held businesses that choose to make a go of it in The Big Apple.
No, I am not referring to the intensely competitive business environment that is NYC, nor am I referring to the high cost of rent and labor in NYC that reduce the margins of every business and challenge the bottom line of every business owner.
Rather, I am referring to the many different kinds of taxes that NYC imposes on closely-held businesses. No business owner can afford to begin operations in NYC without first educating himself as to the taxes that may be imposed upon his business for the privilege of operating in NYC, and the economic cost that these taxes represent.
What follows is a brief summary of these taxes. Some taxes will be familiar to most readers; others will come as a surprise to some readers. Still other taxes are unique to NYC. In some cases, different taxes are imposed upon the same base amount; in others, the application of the tax will depend upon the “tax residence” of the business owner.
Personal Income Tax (the “PIT”)
An individual who is a resident of NYC is responsible for paying NYC Personal Income Tax (at a maximum rate of 3.876%, inclusive of a special surcharge) on the income he derives from all sources, regardless of where the income is generated, and regardless of the nature of the income; for example, it includes a NYC resident’s operating income generated through a sole proprietorship or partnership, as well as dividends received by the NYC resident from a corporation.
On the other hand, a nonresident individual is not subject to PIT, notwithstanding that his income is generated within NYC; for example, a nonresident who is a member of a partnership that does business in NYC is not subject to PIT as to his share of partnership income attributable to NYC; whereas a NYC resident of that same partnership would be subject to PIT on his share of the partnership’s income.
A business owner who calls NYC home – who is “domiciled” in NYC – is a resident taxpayer. One who owns and operates a business in NYC, but who lives outside NYC, and who does not maintain a so-called “permanent place of abode” in NYC, is not a City resident.
However, if the business owner, or if the business, owns or rents an apartment in NYC that the owner may use personally, the business owner could be treated as a City resident for purposes of the personal income tax by virtue of the number of days (more than 183) he spends working in NYC, even if he uses the apartment only infrequently (and even if the apartment is located in a borough other that the one in which the business is located).
Business Corporation Tax (the “BCT”)
Effective for tax years beginning on or after January 1, 2015, several significant changes were made to NYC’s corporate income tax, including, for example, with respect to the nexus, the primary tax base, combined reporting (based on ownership rather than intercorporate transactions), and the apportionment/sourcing of income to NYC.
Unlike the PIT, which is based on residency, a corporation is subject to the BCT based on whether it is “doing business” (i.e., doing business, employing capital, owning or leasing property, or maintains an office) in NYC, for all or any part of its taxable year. The BCT is imposed at a maximum rate of 8.85%. A corporation may be considered to be “doing business” in NYC if it is a partner/member in a partnership/LLC that does business in NYC.
A “corporation” for this purpose includes any entity that is formed as a corporation under state law, as well as an entity that elects (under the “check the box” rules) to be taxable as a corporation for federal tax purposes.
A foreign corporation is not treated as doing business (and thus, would not be subject to the BCT by virtue of certain de minimis activities, including, for example, (1) maintaining cash balances with NYC banks; (2) owning shares of stock or securities that are kept in NYC (as in a safe deposit box, safe, or vault); (3) the maintenance of an office in NYC by a director or officer of the corporation who is not employed by the corporation, provided the corporation is not otherwise doing business in NYC; (4) keeping books or records of the corporation in NYC if they are not kept by employees of the corporation and the corporation does not otherwise do business in NYC; (5) or any combination of the foregoing activities.
The tax is generally determined upon the basis of the corporation’s business income, or the portion thereof that is allocated within NYC. The term “business income” means the corporation’s entire net income, minus investment income and other exempt income. The term “entire net income” generally means total net income from all sources that the taxpayer is required to report to the IRS.
An “S corporation” and its “qualified subchapter S subsidiaries” are not subject to the Business Corporation Tax, but remain subject to the pre-2015 provisions of the General Corporation Tax. NYC does not recognize “S-Corporation” elections, and thus, the S corporation itself is subject to the entity-level BCT (unlike for federal and New York State purposes).
Unincorporated Business Tax (the “UBT”)
NYC imposes the UBT on the unincorporated business taxable income of an unincorporated business (e.g., a partnership) that is wholly or partly carried on within NYC at a rate of 4%. If an unincorporated business is carried on both within and without NYC, a portion of its business income must be allocated to NYC. The UBT is an entity-level tax, and thus, unincorporated business taxable income is subject to both the UBT and, in the case of a NYC resident, the PIT (unlike for federal and New York State purposes, which generally do not impose an entity level tax on unincorporated business income).
An “unincorporated business” means any trade or business conducted or engaged in by an individual (a sole proprietorship) or unincorporated entity, including a partnership. If an individual or an unincorporated entity carries on two or more unincorporated businesses in NYC, all such businesses will be treated as one unincorporated business for the purposes of the tax.
An unincorporated entity will be treated as carrying on any trade or business carried on in whole or in part in NYC by any other unincorporated entity in which the first unincorporated entity owns an interest.
An individual or other unincorporated entity, except a dealer, shall not be deemed engaged in an unincorporated business solely by reason of (A) the purchase, holding and sale of property for his or its own account, (B) the acquisition, holding or disposition, other than in the ordinary course of a trade or business, of interests in unincorporated entities that are themselves acting for their own account, or (C) any combination of such activities. The term “property” generally means real and personal property, including, for example, stocks or bonds.
An owner of real property, a lessee or a fiduciary will not be deemed engaged in an unincorporated business solely by reason of holding, leasing or managing real property. In general, if an owner, lessee or fiduciary (other than a dealer) who is holding, leasing or managing real property, is also carrying on an unincorporated business in NYC, whether or not such business is carried on at, or is connected with, such real property, such holding, leasing or managing of real property shall not be deemed an unincorporated business if, and only to the extent that, such real property is held, leased or managed for the purpose of producing rental income from such real property or gain upon the sale or other disposition of such real property.
In general, the term “unincorporated business gross income” means the sum of the items of income and gain of the business includible in gross income for federal income tax purposes (with certain modifications), including income and gain from any property employed in the business, or from the sale or other disposition by an unincorporated entity of an interest in another unincorporated entity if, and to the extent, such income or gain is attributable to a trade or business carried on in NYC by such other unincorporated entity.
The term “unincorporated business deductions” of an unincorporated business generally means the items of loss and deduction directly connected with or incurred in the conduct of the business, which are allowable for federal income tax purposes for the taxable year (with certain modifications).
If an unincorporated business is carried on both within and without NYC, a portion of its business income must be allocated to NYC.
Commercial Rent Tax (the “CRT”)
NYC requires most tenants to pay the CRT based on the tenant’s base rent (generally at an effective rate of 3.9%) where the annual base rent exceeds $250,000. The CRT is imposed only with respect to “taxable premises.”
The term “taxable premises” generally means any premises located south of the center line of 96th Street in Manhattan that are occupied or used for the purpose of carrying on any trade, business, or other commercial activity, including any premises that is used solely for the purpose of renting the same premises in whole or in part to tenants. Physical occupancy of the premises by the tenant is not required – a tenant’s possessory right to the premises makes them taxable.
The term “base rent” means the amount paid, or required to be paid, by a tenant for the use or occupancy of premises for an annual period, whether received in money or otherwise, including all credits and property or services of any kind, and including any payment required to be made by a tenant on behalf of a landlord for real estate taxes, water rents or charges, sewer rents, or any other expenses (including insurance) normally payable by a landlord who owns the realty, other than expenses for the improvement, repair or maintenance of the tenant’s premises, with certain adjustments.
Sales and Use Tax (the ‘SUT”)
In general, the Sales Tax applies to retail sales of tangible personal property made, and to certain services rendered, where such property or services are delivered within NYC. The SUT also applies to tangible personal property or services that are purchased outside NYC and then used within NYC. The SUT is imposed in addition to, and is administered together with, the New York State sales and use tax.
The SUT rate is 4.5%. Every vendor of property and services subject to the SUT is required to collect the SUT from the purchaser of such property or services. In addition to the SUT, taxable “retail sales” are also subject to the NYS sales and use tax of 4% and a Metropolitan Commuter Transportation District surcharge of 0.375%, thereby bringing the total NYC sales and use tax rate to 8.875%.
Real Property Transfer Tax (the “RPTT”)
The RPTT is imposed on the conveyance of real property, including certain economic interests in real property, situated in NYC. The RPTT is imposed in addition to the NY State Real Estate Transfer Tax.
The RPTT, which is payable by the grantor, applies whenever the consideration for the sale or other transfer is more than $25,000. The tax – which is usually paid as part of the closing costs at the sale or transfer of real property – is imposed as follows: in the case of an interest in non-residential real property, if the value is $500,000 or less, the rate is 1.425% of the consideration; if the value is more than $500,000 the rate is 2.625%. (The New York State Real Estate Transfer Tax applies to transfers in excess of $500, and is imposed at a rate of 0.40% of the consideration.)
A taxable sale includes, among other things, the sale of real property, the grant of a lease of real property (unless the only consideration paid constitutes rent), and the sale of a leasehold interest. The tax is also imposed with respect to the sale or transfer of at least 50% of the ownership in a corporation, partnership, or other entity that owns or leases real property in NYC (and there have been legislative proposals to impose RPTT on all transfers of interests in entities that own or lease real property in NYC, not just those transfers of at least a 50% interest).
Certain transfers are exempted from the tax; among these are the following: a pledging of real property solely as security for a debt; a transfer from an agent or “straw man” to its principal (or vice versa); a transfer that effects a mere change of identity or form of ownership or organization, with no change of the beneficial ownership.
“Hand[s] in the Air for the Big City”? (apologies to Alicia Keys)
No, it’s not a hold-up – more likely a plea for divine intervention – but based upon the above description of some of NYC’s business-related taxes, it certainly may feel that way to a business owner operating in NYC. The number of different taxes for which returns must be filed and taxes paid, and the magnitude of the tax rates, will certainly make some businesses pause before venturing into NYC – even after accounting for the deductibility of some of these taxes for federal income tax purposes, for example – especially when one factors in the other costs involved.
That being said, there may be valid business reasons for a “taxable presence” in NYC, including the panache and visibility of a City address, the proximity to a sophisticated market, and the convenience afforded to certain clients or customers.
These business reasons need to be weighed against the costs of a NYC presence, and that includes City taxes.