New York City Commercial Rent Tax – Don’t Be Caught UnawareBy Jennifer Prendamano | August 20, 2021
Many taxpayers may not be aware of the New York City Commercial Rent Tax (“CRT”), but commercial tenants in Manhattan should inform themselves about its existence and potential impact on their business.
Recently, the NYC Department of Finance has been aggressively pursuing taxpayers who are not in compliance with the CRT. This makes it all the more important for commercial tenants to review the related laws as well as their lease agreements to determine whether they are subject to and in compliance with CRT or risk being hit with unexpected penalties.
Who Is Subject to the Commercial Rent Tax and How Much is it?
The tax applies to commercial tenants south of 96th St. in Manhattan whose annual rent paid is $250,000 or more. However, a tenant is still required to file a tax return if their annual gross rent paid is more than $200,000. The CRT does not apply to rent paid for any premises located north of the center line of 96th Street in Manhattan nor for any premises in any of the other four boroughs of New York City.
The CRT is imposed at an effective rate of no more than 3.9% on rent paid by affected tenants. The actual amount of tax may be less than 3.9% of total rent paid if the rent is less than $300,000 or if the tenant’s total income is less than $10 Million.
Certain lessee’s such as non-profit organizations, certain theatrical productions and tenants leasing property in the World Trade Center Area or in a Commercial Revitalization Abatement Zone are exempt from the tax.
Taxable “Base Rent”
The CRT is imposed on a tenant’s “base rent.” “Base rent” is defined as the rent paid for each taxable premises by a tenant to the landlord for a period, less the amounts received by or due to the tenant for the same period from any subtenant of any part of the premises. This is the case even if the subtenant’s rent paid to the tenant is less than $250,000.
For purposes of the CRT, the definition of the term “rent” is expansive and includes expenses that a taxpayer may not think of as rent. Rent includes any payment made by a tenant that is usually paid by a landlord, including payment made by a tenant for real estate taxes, utilities, water charges, sewer charges, insurance.
Tenant Improvements – Are They Excluded?
Generally, expenses paid by the tenant for the improvement, repair or maintenance of the tenant's premises are not included as rent and, therefore, are not subject to CRT. Based on this statutory exclusion, many taxpayers automatically assume that expenses related to tenant improvements are not subject to CRT.
However, NYC takes the position that if a lease specifies a dollar amount for a work allowance that the landlord is obligated to provide, then the tenant’s payment of this obligation on behalf of the landlord in lieu of fixed rental payments will be subject to the CRT. If a lease does not obligate the landlord to provide a specified work allowance, then the tenant’s leasehold improvement expenditures are not subject to CRT. Therefore, it is important for tenants to review and analyze the terms of their lease agreement to determine whether expenses related to tenant improvements are subject to CRT.
CRT is due not only on office space but also on any other “taxable premises,” such as a warehouse, shop, garage or parking lot. All premises are presumed to be taxable unless the taxpayer can prove otherwise. The term “taxable premises” is defined for purposes of the CRT as premises used or intended to be used to carry on any trade, business, professional, vocational or commercial activity, including premises used solely for the purpose of renting it to subtenants.
Steps To Take If You Are Not In Compliance
Because the statute of limitations never runs out for years for which a tax return is not filed, taxpayers who are not in compliance with the CRT should consider participating in the Department’s Voluntary Disclosure Program (“VDP”). Generally, a taxpayer may participate in a VDP if they have not already been contacted by the Department regarding their obligation to file CRT and have not been notified by the Department of a CRT audit. By entering into a VDP, a taxpayer will be able to take advantage of the waiver of penalties, which can be significant, as well as reduce their CRT liability to a limited lookback period rather than paying CRT on all years.
If you believe your company may be subject to the NYC CRT and could benefit from the Department’s Voluntary Disclosure Program, or if you are currently paying CRT and want to know if you can take advantage of a credit or exemption, please contact Jennifer Prendamano, Director, Tax Advisory Services, or Jay Brower, Leader, State and Local Tax.
About Jennifer Prendamano
Jennifer Prendamano, JD, is a Director in the Tax Services Group at Marks Paneth LLP. To this role, she brings nearly 20 years’ experience in tax controversy matters at the Federal and state and local levels as well as strategic state tax planning and consulting. Ms. Prendamano routinely handles complex state and local tax issues for large, multi-state corporations as well as high net worth individuals, and specializes in IRS examinations, state and local income... READ MORE +