To any visitor to New York City, the streets unfold before them like a labyrinth of complexity. Such is also the case concerning the myriad of taxes imposed by the city and administered by the NYC Department of Finance. The city’s tax provisions can be daunting for the general tax practitioner. Even those who have practiced in the NYC area for years can sometimes find themselves in a quandary, uncertain of how to proceed on behalf of their clients. This article explores areas of difficulty.
Corporate Tax (BCT & GCT)
S Corporations
New York City does not follow the federal pass-through tax treatment of Subchapter S corporations. Instead, they are subject to tax at the entity level. However, while a new Business Corporation Tax (BCT) applicable to C corporations became effective in 2015, S corps remain subject to the old General Corporation Tax (GCT). One significant difference between these two tax regimes concerns sourcing service-based revenue. While C corps must follow a “market-based” approach (sourced where the benefit of the services is received), the rule applied in connection with S corps still relies on a “cost of performance” approach, which sources revenue to where the services are actually performed. Since much of the city’s economy revolves around services, the difference between these two sourcing methodologies can dramatically affect the income base subject to tax in NYC.
Cessation of Business
One often overlooked critical area occurs when a corporation ceases to do business in the city. In such cases, a tax return must be filed (or an extension requested) within a mere 15 days of the date of the cessation of business. For example, suppose a calendar tax year corporation ceases to do business in NYC at year end. In that instance, its tax return for the year of cessation must be filed (or extension requested) by January 15 of the following year, whereas its federal and other state tax returns (or extensions) may not be due until March 15 or April 15. The Department of Finance employs a strict approach to this requirement, and the penalties imposed can be quite burdensome.
Unincorporated Business Tax (UBT)
The city imposes a 4% tax on the net incomes of unincorporated entities taxed as partnerships (including LLCs taxed as partnerships) and sole proprietorships. UBT adopts a single receipts factor apportionment approach. In sourcing service revenue, UBT follows a cost-of-performance sourcing approach. If the services at issue are performed in NYC, receipts generated because of them are considered NYC receipts for NYC apportionment purposes. Since many taxpayers subject to UBT are service-type businesses (e.g., law firms, accounting firms, investment firms, etc.), being aware of the proper sourcing approach is critical. Firms may have an opportunity to limit or even control receipts subject to the UBT arising in connection with services performed outside the geographical boundaries of NYC especially considering the prevalence of remote work arrangements. Those unfamiliar with the city’s tax rules often miss this chance for savings.
Commercial Rent Tax (CRT)
NYC imposes an effective 3.9% tax on certain rents paid by tenants for commercial buildings that geographically fall within a designated area of Manhattan. Some credits available may eliminate the tax or bring the effective rate below 3.9% for certain businesses. The rules surrounding the CRT are complex, but tax practitioners often overlook an opportunity for tax relief for qualifying clients. In essence, the tax base for primary tenants may be reduced by the amount of rents paid by commercial subtenants, even if the subtenants’ rents fall outside the scope of the CRT. Thus, subtenant rents not subject to the CRT are deductible against the taxable rents of primary tenants.
Conclusion
The New York City tax provisions are very convoluted, and falling out of compliance or missing planning opportunities is not unusual. CBIZ’s state and local tax professionals can offer taxpayers skilled guidance to navigate the maze.
If you have any questions or concerns regarding New York City tax laws, please contact a CBIZ SALT professional.
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