A Common Problem
Recently, I received a call from a gentleman who had been doing business in New York City for over 30 years. He had just been contacted by the New York City Department of Finance (the “Department”) about his business’ potential Commercial Rent Tax (“CRT”) obligations. He knew nothing about the CRT and had not been informed of it at any time by the tax professionals he was working with.
The situation related above is not an unusual one. I’ve written a number of articles about various aspects of state and local taxation, ranging from economic nexus to employee/independent contractor issues. Yet the articles that have generated the majority of the calls I receive from non-clients are those associated with the CRT. There are many misconceptions about the tax, even among tax professionals. Moreover, there appear to be many businesses not currently in compliance with the CRT because they simply have no knowledge that it even exists.
The CRT – What Is It?
The CRT is a 6% tax imposed on the rent paid by commercial tenants who occupy or use property located in Manhattan south of a hypothetical center line running down 96th Street. If a tenant pays annual rent of $200,000 or more, CRT returns must be filed. However, no CRT liability arises until the annual rent reaches $250,000 or more. The CRT year runs from June 1st through May 31st of the following year. Tenants with annual taxable rents between $250,000 and $300,000 are eligible for a sliding scale credit that partially offsets the tax.
The definition of “rent” for purposes of the CRT is very broad-based in nature. It is the amount paid or required to be paid for the use or occupancy of commercial space, and includes any payment made by a tenant with respect to an item usually paid by a landlord. Thus, it includes payments made by a tenant for real estate taxes and water charges.
Once the amount of rent is determined, the next step in the CRT process is to calculate the amount of “base rent,” which is the actual base upon which the tax is calculated. In essence, base rent is determined by applying certain permitted deductions or exclusions to the rent. In arriving at the amount of base rent, a tenant’s rent may be reduced by the amount of any rent paid to the tenant by any subtenants. This reduction applies even if the amount of annual rent paid by a subtenant falls below the $250,000 per year threshold that triggers a CRT payment obligation. Once the rent has been reduced for any subtenant rentals, the remaining amount is further reduced by 35% to arrive at the base rent number. The 35% reduction is applicable whether or not the tenant has any subtenants.
Assume Daisy Company rents commercial space in an office building located in Midtown Manhattan for which it pays annual rent of $5,000,000. In addition to the rent it pays the landlord, it pays an additional $650,000 per year in real estate taxes. Further, Daisy rents several offices to a subtenant at an annual rent of $150,000. Daisy’s annual rent for purposes of the CRT is $5,650,000 ($5,000,000 plus $650,000 = $5,650,000). Daisy’s base rent is $3,575,000 ($5,650,000 minus $150,000 = $5,500,000 x 65% = $3,575,000). Thus, Daisy’s annual CRT obligation is $214,500 ($3,575,000 times 6% = $214,500).
The arrangements between tenants and landlords in Manhattan are many and varied, as are the types of businesses that people are engaged in. Applying the parameters of the CRT to real life situations can be challenging at times, but when the Department conducts an audit, having some previous knowledge of its approach in similar circumstances is often quite advantageous. To that end, I consider below a couple of situations that I have encountered recently in my practice.
A tenant operates under a historic long-term lease. The tenant’s rent is significantly below $100,000 per year. A tenant sub-leases the space out for an annual rent well in excess of $1,000,000 annually. Even though Tenant’s yearly rent falls well below any CRT filing or payment responsibility, its subtenant is fully subject to the CRT.
A tenant rents a very large space for an annual rent well in excess of $1,000,000. It often contracts for short-term rentals of portions of its space. The rentals are often for periods as short as one day, but its clients frequently use its space multiple times during the year. Even if the days a subtenant rents space are not contiguous, as long as the subtenant rents space at least 14 days during a particular year, the rent it pays to the tenant may be deducted from the tenant’s rent in calculating its base rent amount.
The Department is aware that many of the businesses that are subject to the CRT are not filing returns or paying the tax. With that in mind, it is increasing its audit efforts in the CRT area. Moreover, both the Department’s Unincorporated Business Tax returns, as well as its General Corporation Tax returns, have included line items regarding potential CRT filing obligations for several years. The “pain” of the CRT can be offset somewhat by its deductibility as an expense
for income tax purposes.
Taxpayers who are subject to the CRT but have not been filing returns and paying the tax should seriously consider entering the Department’s Voluntary Disclosure Program. By doing so, a taxpayer is relieved of all penalties in connection with its CRT liabilities, as well as the imposition of possible penalty interest (statutory interest is imposed). In addition, a limited “look back” period can often be negotiated pursuant to which the Department will only go back three years in terms of past CRT obligations. The application process is easy and can be done on an anonymous basis through a tax professional if a taxpayer prefers. As noted above, the Department is targeting CRT “scofflaws,” and has been increasing its efforts to identify them and bring them into compliance. Once contacted by the Department, a taxpayer generally is precluded from entering the Voluntary Disclosure Program. Thus, the time for taxpayers to act is prior to receiving a “knock on the door” from the Department.
If you have any questions with respect to the CRT, please contact the author at (212) 842-7019 or via e-mail at email@example.com, or your Friedman LLP tax professional.