NYC could face significant tax revenue losses over remote work

City's Unincorporated Business Tax generated more than $2B in revenue last year

New York City could lose out on millions of dollars' worth of revenues from its Unincorporated Business Tax as businesses shift operations out of the Big Apple during the coronavirus pandemic.

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The UBT is a 4 percent tax levied on taxable income allocated to New York City. Individuals and unincorporated entities that are working in, or currently liquidating, a trade, business, profession or occupation either wholly, or partially, in the city are subject to the tax.

Financial services firms and law firms, as well as other individually owned business, may be exposed.

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Phil Drudy, managing director and tax practice leader for CBIZ MHM’s New York Tax Department, explained that a law firm, for example, which earned $1,000 with 30 percent of its business conducted in New York City would have $300 includable in calculating UBT.

But now many law firms and financial service firms have shifted operations outside of the city to places like the Hamptons, Westchester, Connecticut and even Florida. That means if no percentage of business is conducted within New York City, the includable UBT income is $0.

“It could be a very big hit to [New York] for the industries that have shifted the services,” Drudy said. “I think going forward a lot of businesses are rethinking whether they need to be in the city that much.”

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Businesses that don’t organize as a corporation – across all sectors of the economy – including real estate management and construction, are exposed to the 4 percent levy.

However, according to city officials, Wall Street is one of the main drivers of the city's business tax.

New York City generated more than $2 billion in revenue from the tax last year. Prior to the coronavirus outbreak, the city comptroller’s office expected revenues from the tax to increase 5.9 percent annually.

For fiscal year 2020, revenue estimates were more than $2 billion, hitting $2.3 billion in fiscal 2021.

However, in May estimates for UBT revenue were revised lower to a 0.1 percent yearly decline. In 2020, the city expects to earn about $1.68 billion from UBT and $1.65 billion in 2021.

If companies do end up allowing remote work to become a permanent option in some cases, the revenue hit could be long-term, Drudy added.

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Meanwhile, the city is dealing with a $9 billion revenue shortfall due to the virus outbreak.

In May, New York City Comptroller Scott Stringer said the shutdown of economic activity was having an "unprecedented" effect on business taxes, including UBT. He predicted business tax losses of 25 percent in the fourth quarter, when compared with pre-COVID estimates.

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