By Tom Corrie, JD, LLM, Director of State and Local Tax, Friedman LLP
This article was originally published in the March/April 2013 issue of Tax Matters.
Anyone doing business in New York City soon realizes that the City imposes a myriad of taxes, certain of which are somewhat unique in nature. Perhaps one of the most overlooked of the City’s taxes is the Commercial Rent Tax (“CRT”). Often taxpayers only become aware of it when they are under audit for another form of tax (e.g., Unincorporated Business Tax, General Corporation Tax) and the auditor asks to see their CRT returns. Also, taxpayers should note that starting with the tax forms applicable to 2011, both the General Corporation and Unincorporated Business Tax returns include lines asking if the taxpayer is subject to the CRT, and, if so, whether all required CRT returns have been filed. For fiscal year 2009, the City’s CRT revenues stood at approximately $580 million.
The CRT is applicable to commercial tenants paying annual rents of $250,000 or more for premises located in Manhattan south of 96th Street. Tenants whose annual rents are below the $250,000 threshold amount (calculated without respect to the 35% reduction permitted in calculating taxable base rent) are exempt from the CRT. The CRT is not imposed on commercial tenants located in the outer boroughs of the City.
The definition of what constitutes “rent” for purposes of the CRT is very broad. In general, it is the amount paid or required to be paid for the use or occupancy of a premises and includes any payment made by the tenant that is usually payable by the landlord (e.g., real estate tax, water charges, insurance, etc.), but does not include expenses for improving, repairing or maintaining the tenant’s leasehold premises.
The CRT is imposed at the rate of 6% on a tenant’s “base rent.” Base rent is the rent paid by the tenant to the landlord less certain specified deductions or exclusions. For example, in calculating base rent, the City permits a deduction of 35% of the rent amount. Further, in determining base rent, the amount of a tenant’s rent may be reduced by the amount of any rent received by, or due them, from a subtenant, even if the amount of rent due pursuant to the sublease falls below the $250,000 threshold annual rent amount, making the subtenant not subject to the CRT.
For instance, in calculating base rent, if Smith Co. occupies taxable premises located on East 47th Street for which it pays annual rent to the landlord of $1,000,000, and receives annual rent of $150,000 from a subtenant, the $1,000,000 rent amount may be reduced by 35% to $650,000, and then subsequently further reduced by the $150,000 paid by the subtenant. Consequently, the amount of base rent to which the 6% tax rate would be applied would be $500,000.
The CRT tax year begins on June 1st and ends on May 31 of the following calendar year. The City requires tenants subject to the CRT to file quarterly returns, and remit the tax, within 20 days of the end of the following periods: (1) June 1 to August 31, (2) September 1 to November 30, and (3) December 1 to February 28. An annual return must be filed for every tenant no later than June 20 for the tax year ending on the previous May 31. The tax payment submitted with the annual return must be for the amount of CRT actually due for the year that exceeds the tax amounts submitted with the previous three quarterly returns.
Help Is Available
Taxpayers subject to the CRT who have not been filing the requisite tax returns and remitting the tax should seriously consider applying to enter New York City’s Voluntary Disclosure Program with respect to their outstanding tax liability. Upon acceptance into the program, all penalties are generally waived and a limited “look-back” period is employed (usually 3 years). Application to the Program may be done by a third-party service provider on behalf of a taxpayer, who may wish to remain anonymous until the terms of the City’s Voluntary Disclosure Agreement are spelled out.
It should be noted, however, that the opportunity to enter the Voluntary Disclosure Program generally evaporates once a taxpayer has been contacted by the City regarding their potential CRT liability. As a result, affected taxpayers should know that “time is of the essence” once they discover they have fallen short when it comes to their CRT obligations. Remember, the City’s motto in this regard is “We’d love to hear from you before you hear from us.” For more information on New York State’s Voluntary Disclosure Program, please read Tax Manager Andrew Cohen’s article here.
Please contact your Friedman LLP service provider if you have any questions about the CRT and how it may apply to you.
If you have any questions about the content of this article, please contact Friedman LLP Director Tom Corrie at (212) 842-7019 or firstname.lastname@example.org, or contact your engagement partner.