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New York Commercial Rent Tax

As New York City and many countries around the world begin to resume some normalcy following the rise in vaccinations, business activities are anticipated to accelerate recovery back to pre-COVID levels. While business owners will surely welcome the increased income that should result, anticipated tax law changes will make this rebound bittersweet for many.

While most will be taking strategies to mitigate their liability for income taxes paid, the same steps should be taken where available for the New York Commercial Rent Tax (“CRT”).

For those renting space in Manhattan south of the center line of 96th Street, the CRT is not a new concern and has been around for nearly 60 years. The CRT is a tax charged on rent paid for space relating to any trade, business, profession, or commercial activity in this designated area.

You heard that correct – a tax paid on an expense that usually reduces the tax bill.

While there are exemptions from the tax such as minimum rent fees paid subject to tax, small business credits for those below a certain income threshold, and those within certain zones of the CRT area, this tax is unavoidable for most large businesses. Even though this may seem counter-intuitive, the solution to mitigate this tax is equally counter-intuitive – earn income on the space through subleasing.

If there is one thing that has been proven through the COVID-19 pandemic, it is that a majority of companies were operating with excess office, meeting, or common space and that there are many employees who can perform their tasks on a limited- or fully-remote schedule. This has left companies paying rent and CRT on significantly more space than is required for the business to function.

While income tax laws contain a plethora of options for deductions and other strategies to mitigate taxes owed, the major deduction available for the CRT is through subleasing income. Through a sublease, a Company is able to offset all or a portion of the expenses paid on a dollar-for-dollar basis by passing the expense along to the sub-lessee and recognizing the income on the Company’s regular income tax return. For those with net operating losses, this could provide the added benefit of bringing in additional income on unoccupied space while simultaneously avoiding the 6% base rent tax assessed and providing means to use the losses to offset other taxes. Even for those without operating losses, this provides a tax incentive to offset the additional income that will be gained from subleasing; a true win-win situation for those who are considering how they will be doing business moving forward.

Conclusion

While the Commercial Rent Tax may be unavoidable, all companies with the means and available space should explore the option of subleasing. In addition to the extra income, this provides the added benefit of reducing CRT obligations.

Author: Matthew Trubenbach-Byrne, CPA, CCIFP

Contact our Withum’s Real Estate Team Member to help address your questions regarding New York Commercial Rent Tax.

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