The City Never Sleeps – But It Does Tax
“If I can make it there, I’ll make it anywhere.” So begins one of the most iconic of musical tributes to New York City. It is sung at every Yankees game. It sums up the feelings of thousands of aspiring artists. As it turns, out, however, it also captures the reaction of many closely-held businesses that choose to make a go of it in The Big Apple.
No, I am not referring to the intensely competitive business environment that is NYC, nor am I referring to the high cost of rent and labor in the City that reduce the margins of every business and challenge the bottom line of every business owner.
Rather, I am referring to the many different kinds of taxes that the City imposes on closely-held businesses. No business owner can afford to begin operations in the City without first educating himself as to the taxes that may be imposed upon his business for the privilege of operating in the City, and the economic cost that these taxes represent.
What follows is a brief summary of these taxes. Most readers will be familiar with some of them; others will come as a surprise to some readers. Still other taxes are unique to NYC. In some cases, different taxes are imposed upon the same base amount; in others, the application of the tax will depend upon the “tax residence” of the business owner.
Personal Income Tax
An individual who is a resident of NYC is responsible for paying NYC Personal Income Tax (at a maximum rate of 3.876%, inclusive of a special surcharge) on the income he derives from all sources, regardless of where the income is generated, and regardless of the nature of the income; for example, it includes operating income generated through a sole proprietorship or partnership, and dividends paid by a corporation.
A nonresident individual, however, is not subject to the City’s Personal Income Tax, notwithstanding that his income is from within the City; for example, a nonresident who is a member of a partnership that does business in the City is not subject to the tax as to his share of partnership income attributable to the City, while the share of a similarly situated resident is taxable.
A business owner who calls the City home – who is “domiciled” in the City – is a resident taxpayer. One who owns and operates a business in the City, but who lives outside the City, and who does not maintain a so-called “permanent place of abode” in the City, is not a City resident.
However, if the business owner, or if the business, owns or rents an apartment in the City that the owner may use personally, he may be treated as a City resident for purposes of the personal income tax by virtue of the number of days (more than 183) he spends working in the City, even if he uses the apartment only infrequently (and even if the apartment is located in a borough other that the one in which the business is located).
Business Corporation Tax
Effective for tax years beginning on or after January 1, 2015, several significant changes were made to NYC’s corporate income tax, including, for example, with respect to the nexus, the primary tax base, combined reporting (based on ownership rather than intercorporate transactions), and the apportionment/sourcing of income to the City.
A corporation that does business, employs capital, owns or leases property, or maintains an office (i.e., is “doing business”) in the City, for all or any part of its taxable year, must pay the Business Corporation Tax (at a maximum rate of 8.85%). A corporation may be considered to do business in the City if it is a partner/member in a partnership/LLC that does business in the City.
The term “corporation” includes any entity that is taxable as a corporation for federal tax purposes, by election (under “check the box” rules), or otherwise.
A foreign corporation is not subject to the Business Corporation Tax by virtue of certain de minimis activities, including, for example, (1) maintaining cash balances with NYC banks; (2) owning shares of stock or securities that are kept in the City (as in a safe deposit box, safe, or vault); (3) the maintenance of an office in the City by a director or officer of the corporation who is not employed by the corporation, provided the corporation is not otherwise doing business in the City; (4) keeping books or records of the corporation in the City if they are not kept by employees of the corporation and the corporation does not otherwise do business in the City; (5) or any combination of the foregoing activities.
The tax is generally determined upon the basis of the corporation’s business income, or the portion thereof that is allocated within the City. The term “business income” means the corporation’s entire net income, minus investment income and other exempt income. The term “entire net income” generally means total net income from all sources that the taxpayer is required to report to the IRS.
An “S corporation” and its “qualified subchapter S subsidiaries” are not subject to the Business Corporation Tax, but remain subject to the pre-2015 provisions of the General Corporation Tax. The City does not recognize “S-Corporation” elections.
Unincorporated Business Tax
The City imposes an unincorporated business tax (“UBT”) on the unincorporated business taxable income of an unincorporated business (at a rate of 4%) that is wholly or partly carried on within the City. The tax is imposed in addition to any other taxes that may be imposed on such income (for example, the personal income tax).
An “unincorporated business” means any trade or business conducted or engaged in by an individual (a sole proprietorship) or unincorporated entity, including a partnership. If an individual or an unincorporated entity carries on two or more unincorporated businesses in the City, all such businesses will be treated as one unincorporated business for the purposes of the tax.
An unincorporated entity will be treated as carrying on any trade or business carried on in whole or in part in the City by any other unincorporated entity in which the first unincorporated entity owns an interest.
An individual or other unincorporated entity, except a dealer, shall not be deemed engaged in an unincorporated business solely by reason of (A) the purchase, holding and sale of property for his or its own account, (B) the acquisition, holding or disposition, other than in the ordinary course of a trade or business, of interests in unincorporated entities that are themselves acting for their own account, or (C) any combination of such activities. The term “property” generally means real and personal property, including, for example, stocks or bonds.
An owner of real property, a lessee or a fiduciary will not be deemed engaged in an unincorporated business solely by reason of holding, leasing or managing real property. In general, if an owner, lessee or fiduciary (other than a dealer) who is holding, leasing or managing real property, is also carrying on an unincorporated business in the City, whether or not such business is carried on at, or is connected with, such real property, such holding, leasing or managing of real property shall not be deemed an unincorporated business if, and only to the extent that, such real property is held, leased or managed for the purpose of producing rental income from such real property or gain upon the sale or other disposition of such real property.
In general, the term “unincorporated business gross income” means the sum of the items of income and gain of the business includible in gross income for federal income tax purposes (with certain modifications), including income and gain from any property employed in the business, or from the sale or other disposition by an unincorporated entity of an interest in another unincorporated entity if, and to the extent, such income or gain is attributable to a trade or business carried on in the City by such other unincorporated entity.
The term “unincorporated business deductions” of an unincorporated business generally means the items of loss and deduction directly connected with or incurred in the conduct of the business, which are allowable for federal income tax purposes for the taxable year (with certain modifications).
If an unincorporated business is carried on both within and without the City, a portion of its business income must be allocated to the City.
Commercial Rent Tax
The City requires every tenant to pay a tax on the tenant’s base rent (at a 6% rate) where the annual base rent exceeds $250,000. The tax is imposed only with respect to taxable premises that are located south of the center line of 96th Street in Manhattan.
The term “taxable premises” generally means any premises in the City that is occupied or used for the purpose of carrying on any trade, business, or other commercial activity, including any premises that is used solely for the purpose of renting the same premises in whole or in part to tenants. Physical occupancy of the premises by the tenant is not required – a tenant’s possessory right to the premises makes them taxable.
The term “base rent” means the amount paid, or required to be paid, by a tenant for the use or occupancy of premises for an annual period, whether received in money or otherwise, including all credits and property or services of any kind, and including any payment required to be made by a tenant on behalf of a landlord for real estate taxes, water rents or charges, sewer rents, or any other expenses (including insurance) normally payable by a landlord who owns the realty, other than expenses for the improvement, repair or maintenance of the tenant’s premises, with certain adjustments.
Sales and Use Tax
In general, the Sales Tax applies to retail sales of tangible personal property made, and to certain services rendered within, the City, and the Use Tax applies if to tangible personal property or services that are purchased outside the City and then used within the City. The tax is imposed in addition to the NY State sales and use tax, and is administered together with the State tax.
The City’s Sales and Use Tax rate is 4.5%, and the vendor is required to collect the tax from the purchaser of the property or service; in addition, a Metropolitan Commuter Transportation District surcharge of 0.375% is imposed on the taxable sale or use, thereby bringing the total City tax rate to 8.875% (inclusive of the State’s 4% tax).
Real Property Transfer Tax
The City imposes a Real Property Transfer Tax (“RPTT”) on the conveyance of real property, including certain economic interests in real property, situated in NYC. The RPTT is imposed in addition to the NY State Real Estate Transfer Tax.
The RPTT, which is payable by the grantor, applies whenever the consideration for the sale or other transfer is more than $25,000. The tax – which is usually paid as part of the closing costs at the sale or transfer of real property – is imposed as follows: in the case of an interest in non-residential real property, if the value is $500,000 or less, the rate is 1.425% of the consideration; if the value is more than $500,000 the rate is 2.625%. (The State transfer tax applies to transfers in excess of $500, and is imposed at a rate of 0.40% of the consideration.)
A taxable sale includes, among other things, the sale of real property, the grant of a lease of real property (unless the only consideration paid constitutes rent), and the sale of a leasehold interest. The tax is also imposed with respect to the sale or transfer of at least 50% of the ownership in a corporation, partnership, or other entity that owns or leases real property in the City.
Certain transfers are exempted from the tax; among these are the following: a pledging of real property solely as security for a debt; a transfer from an agent or “straw man” to its principal (or vice versa); a transfer that effects a mere change of identity or form of ownership or organization, with no change of the beneficial ownership.
“Hand[s] in the Air for the Big City”? (apologies to Alicia Keys)
No, it’s not a hold-up – more likely a plea for divine intervention – but based upon the above description of some of NYC’s business-related taxes, it certainly may feel that way to a business owner operating in the City. The number of different taxes for which returns must be filed and taxes paid, and the magnitude of the tax rates, will certainly make some businesses pause before venturing into the City – even after accounting for the deductibility of some of these taxes for federal income tax purposes, for example – especially when one factors in the other costs involved.
That being said, there may be valid business reasons for a “taxable presence” in NYC, including the panache and visibility of a City address, the proximity to a sophisticated market, and the convenience afforded to certain clients or customers.
These business reasons need to be weighed against the costs of a NYC presence, and that includes City taxes.