A new bill introduced in the City Council this week would pause the commercial rent tax for three years to soften the blow to small businesses. Supporters say the change would give thousands of businesses a much-needed tax break.
The Commercial Rent Tax (CRT) is a 3.9% tax on base rent paid by tenants for premises in Manhattan south of the center line of 96th Street. It applies to any tenant who occupy, or is using or intends to use, any property for commercial purposes.
What is CRT?
New York City imposes the commercial rent tax (CRT) on base rent paid by tenants that are occupying premises located in Manhattan south of the center line of 96th Street. Those who are subject to CRT include both owners and tenants of real estate, including office, retail and industrial buildings and apartments.
Tenants are required to file a quarterly return for each of their periods and an annual return (Form CR-A) when they are subject to CRT. If a tenant ceases to do business, the tax is due immediately and a final return for the entire year must be filed within 20 days of the date of termination.
To determine the amount of base rent that is subject to CRT, complete lines 9 through 12 on page two of Form CR-Q1 for each period covered by the tax. The amount shown on line 9 is the base rent for the first three months of the period, while the amounts shown on lines 10 through 12 represent the rent for the rest of the period.
The amount shown on lines 10 through 12 should not exceed the total base rent for the taxable premises for the period. If the amount of base rent exceeds the total base rent for the taxable premises, it is necessary to enter the actual rental payments received from each subtenant on each occu- pancy.
If a lease obligates the landlord to provide work allowances or other expenses for tenant improvements, such payments must be included in the base rent for the period. Alternatively, if the lease does not provide for such expenditures, such costs may be excluded from the basis of the base rent.
Many leases contain a provision that allows a tenant to occupy space for free for a negotiated length of time, such as a “free rent” period. However, this provision is not a “credit” under the law, which means that it will not be able to reduce the amount of commercial rent tax that is imposed on the tenant.
If your company is paying CRT on its commercial real estate, it is essential to contact a tax attorney with experience in the area to help you dispute these audit assessments. Additionally, businesses that are not compliant with CRT should consider participating in the Department’s Voluntary Disclosure Program, which offers a waiver of penalties and a limited lookback period.
What is the CRT Tax Rate?
The commercial rent tax (CRT) is imposed by New York City on base rent paid by tenants of real property. This includes a broad range of payments such as common area maintenance, parking and janitorial services. Additionally, a tenant’s share of the landlord’s property taxes, insurance and other charges are also taxable.
CRT is a source of revenue for the City of New York, but it can also impact businesses. As a result, many business owners may find it difficult to navigate the complicated nature of CRT and its numerous credits, exemptions and other intricacies.
In order to help small businesses avoid the CRT, the City of New York has a threshold-based Small Business Tax Credit that provides a full or partial credit depending on the total income of a small business and its annual base rent amount. As a general rule, small businesses with total income of $5 million or less and that pay no more than $500,000 in rent per year are eligible for a full CRT exemption.
However, businesses with total income above $5 million and those that pay rent between $250,000 and $500 thousand per year are eligible for a partial credit. This is intended to reduce the tax burden on businesses in the NYC economy and will allow more businesses to stay in the city.
The CRT tax rate is 6% of the sum of all base rent amounts charged by the landlord. This rate is reduced by a 35% base rent reduction for businesses with a lower income.
As the commercial rent tax is a significant consideration for many business owners, it is important to consult with a qualified professional to determine your eligibility and to ensure you are filing and remitting all required taxes on time. PMBA has experience assisting clients with the entire commercial rent tax return process and can provide you with guidance and assistance in preparing and filing your own returns.
Charitable remainder trusts are a great way to contribute highly appreciated assets that would otherwise be subject to capital gains tax. They can be funded with cash or appreciated property, and the proceeds can then pass to one or more charitable organizations free of capital gains tax. Moreover, they can be an excellent choice for donors looking to defer capital gains tax and diversify their investments.
What is the CRT Exemptions?
As you may know, the NYC Commercial Rent Tax (CRT) has a variety of exemptions and credits that can help reduce its tax burden on businesses. In particular, the CRT has a threshold-based Small Business Tax Credit that can significantly reduce the tax liability for small businesses located in Manhattan and those whose income falls below certain thresholds.
For example, if you are the owner of an office building with total income of $5 million or less and pay no more than $500,000 in rent per year, you are eligible for the full CRT exemption. However, if you have total income of between $5 million and $10 million and pay between $250,000 and $300,000 in rent per year, you are eligible for a partial, sliding scale credit that partially offsets your CRT liability.
You can also donate a significant amount of real estate to a charitable remainder trust (CRUT). The value of your gift will be deducted from your gross income, and you will receive annual distributions that are exempt from tax as well. You can choose to invest the remainder in whatever asset class you want, and the charity will receive the difference.
In addition, you can take a charitable income tax deduction for the entire amount you contribute to the trust, which is based on a formula based on the percentage of your total annual distributions that go to the charity. This is an excellent tool for asset diversification, especially if you have non-income-producing properties that you’d like to convert into a retirement account or other assets with little or no capital gain.
A CRUT is a great way to sell your New York City property without paying any up-front capital gains taxes, which can add up quickly in a high-tax jurisdiction like ours. It’s also a great way to preserve the full value of highly appreciated assets, which often have large capital gains taxes.
One of the most exciting aspects of the new CRT Exemptions Rule is its requirement that banks designate customers who qualify for “exempt persons.” This means that, unlike the current exemption process, a bank will need to file a designation with the Treasury on any customer who it believes qualifies for such an exemption. This procedure is intended to be a means by which the Treasury can monitor the effectiveness of the CTR Exemptions Rule, as well as to ensure that all of its customers who qualify for such an exemption are continuing to do so.
What is the CRT Credits?
The CRT credits are cash flows used to collateralize a credit risk transfer (CRT) transaction. These cash flows are generated from a combination of principal repayments and interest payments on credit-linked notes issued by the GSEs. The cash flows are then aggregated across thousands of mortgages to support a CRT transaction.
Freddie Mac and Fannie Mae pioneered the single-family credit risk transfer (CRT) market in 2013. Today, industry-leading CRT programs support Freddie Mac’s mission to provide stability, liquidity and affordability to the U.S. housing market by transferring credit risk from the GSEs to global private capital.
While the CRT credit is a significant step in limiting taxpayer exposure to housing risks, a broader set of reforms are needed. This includes the end of the conservatorship of the GSEs, which would release them from a potential government backstop. A robust system of private capital supporting the GSEs minimizes volatility in the housing finance market, improves market stability and helps ward off another systemic collapse.
GSE CRT programs, including Freddie Mac’s Single-Family CRT and Fannie Mae’s Agency Credit Insurance Structure (ACIS), were established to structure mortgage credit risk into securities and (re)insurance offerings and provide coverage for losses from a reference pool of mortgages. The average CRT issuance from 2012 through 2021 has provided credit losses coverage ranging from 0.20% to 4.00% of the original unpaid principal balance (UPB) of the reference pool.
The structural features of a GSE CRT security include the attachment point and detachment points, which indicate the level at which a credit loss begins to incur. The attachment point is expressed as a percentage of the original UPB and indicates the point at which losses begin to be paid out by reinsurance or the full principal write-down occurs.
In addition, credit risk is estimated in alternative scenarios using forecasts from Milliman’s Mortgage Pricing Insights and Reinsurance (M-PIRe) model. For example, for a reference pool with an attachment point of 0.50% and a detachment point of 1.00%, the ultimate credit losses are estimated at 0.26% in the baseline scenario and up to 1.25% if home prices decline by 20%.
