Sarah S. Kim, J.D., LL.M.
06.07.21 | SALT Chat
You are planning to open a business location in Manhattan. You find a great space in the heart of Manhattan and quickly sign the lease agreement. By doing so, you have not only assumed the duties and obligations as a tenant under the lease, but you have also stepped into the world of the New York City (NYC) Commercial Rent Tax (CRT).
CRT is an arcane tax that was first implemented in 1963 to increase NYC’s tax revenue. Over the past several decades, this tax has become increasingly familiar to businesses operating in Manhattan as the NYC Department of Finance has ramped up its efforts to identify and audit non-filers. Nevertheless, CRT remains unknown to many taxpayers and is often nonsensical to those who have become familiar with it (as one of my clients put it: “They charge tax on rent!”).
Generally, tenants who lease property for commercial purposes in Manhattan, south of 96th Street, are subject to CRT. Certain exemptions are available to properties leased by governmental bodies or nonprofit organizations or those located in the World Trade Center Area or the Commercial Revitalization Program zone. Also, businesses located in the other four boroughs of NYC are not subject to this tax.
Tenants are subject to CRT at an effective rate of 3.9% on base rent paid if their annualized base rent paid is over $250,000. Base rent is rent paid less any amounts received from subtenants and other deductions/exemptions. Rent includes any payments the tenant is responsible for and nonpayment of which deprives the tenant of the right to occupy the rented space. For example, utility charges allocated by the landlord that are not separately metered, water and sewer charges, real estate taxes, and common area maintenance fees are all considered rent subject to CRT.
The CRT tax year runs from June 1st through May 31st. So if you started paying rent in May — let’s say $25,000 per month — the rent paid for the tax year would be well below the $250,000 threshold because there is only one month left in the tax year. However, you would still owe tax because the annualized rent for the year is $300,000 ($25,000 times 12 months), exceeding the base rent threshold. The taxpayers should file quarterly returns and pay taxes due throughout the year, and at the close of the tax year, file an annual return. Please note that Monday, June 21st is the due date for filing the annual CRT return for the tax year ended May 31, 2021.
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Sarah S. Kim is a Senior Tax Manager in Berdon LLP’s State and Local Tax Group with nearly 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.