New York City Commercial Rent Tax (“CRT”) certainly has a habit of sneaking up on people. In fact, many professionals and non-professionals simply do not know it exists – that is until an audit notice comes their way.
I continue to receive numerous inquiries with respect to the CRT, and I find that although knowledge of the tax exists, the basic parameters of the CRT sometimes remain a mystery. Certain folks who are not adept at the CRT, continue to play the “audit lottery,” waiting until their potential CRT liability rises to a level that if they were forced to pay all outstanding obligations, they would be at risk of being put out of business.
The New York City Department of Finance (the “Department”) has stepped up its audit efforts regarding potential outstanding CRT obligations. Evidence of this can be found by the addition, as of 2011, of questions concerning a taxpayer’s potential CRT liability to both the NYC General Corporation Tax return and the Unincorporated Business Tax return. The Department is aware that many taxpayers subject to the CRT are not paying the tax, and has committed significant resources to alleviating that problem.
What is the CRT?
The CRT is a 6% tax imposed on commercial tenants who occupy or use property located in Manhattan south of a hypothetical center line running down 96th Street. An annual rent of $250,000 or more is the triggering event which gives rise to a CRT obligation. However, if a tenant pays annual rent of $200,000 or more, CRT returns must be filed even though there is no tax liability. These amounts must be considered prior to any deductions that may be available to the taxpayer.
“Rent” for CRT purposes is defined very broadly. It is the amount paid or required to be paid for the use or occupancy of a space, and includes any payment made by a tenant that is usually paid by a landlord. Accordingly, payments made by a tenant for real estate tax and water charges must be added to the rent, while payments made for improving the leased premises are not required to be.
The amount of a tenant’s “base rent” is the key element in determining CRT liability. Base rent is determined by calculating the amount of rent paid by the tenant to the landlord, less certain permitted deductions or exclusions. Initially, in arriving at the base rent figure, a tenant’s rent is reduced by the amount of rent received by, or due from, a subtenant. This reduction applies even if the subtenant’s rent falls below the CRT threshold of $250,000. After applying any subtenant reduction, the amount of any remaining rent is further reduced by 35%. This reduction applies whether the tenant has any subtenants or not.
Taking a Closer Look: An Example of a CRT Calculation
Assume Gizmo Company occupies commercial space located in mid-town Manhattan for which it pays annual rent of $4,000,000. It also pays real estate taxes totaling $500,000 on behalf of the landlord. It sublets a small portion of the leased premises to Widget Company for $200,000 a year. In calculating its total rent amount, Gizmo must add the $500,000 of real estate taxes to the annual rent it pays the landlord, for a total of $4,500,000 of annual rent. Next, in determining its base rent, Gizmo is permitted to reduce its rent figure by the $200,000 it receives from its subtenant, Widget Company, and then further reduce its rent by 35% of the remaining $4,300,000. Consequently, Gizmo’s base rent is $2,795,000, and its CRT liability is $167,700 (6% of its base rent).
How to Avoid the Audit Lottery
The Department is actively seeking out taxpayers who should be paying the CRT, but are not. Those businesses who have potential outstanding CRT liabilities should seriously consider applying to the Department’s Voluntary Disclosure Program to limit the number of years back the Department will seek to collect the taxes, as well as to avoid the imposition of penalties. In addition, the Department is often willing to work out payment plans with respect to those taxpayers who do not have the ability to pay their outstanding CRT liabilities all at once. Finally, it should be noted that once the Department contacts a taxpayer regarding potential CRT liabilities, the opportunity to apply to the Voluntary Disclosure Program is generally lost. The application process is relatively painless, and can be done on an anonymous basis through a tax professional if a company prefers.
Don’t ignore the CRT; the Department certainly doesn’t.
If you have any questions regarding the CRT, please contact the author at (212)842-7019, or via e-mail if you prefer at firstname.lastname@example.org, or your Friedman LLP tax professional.