Is NYC UBT Deductible on a Federal Tax Return?

The Unincorporated Business Tax (UBT) in New York City is a local tax imposed on businesses that are not structured as traditional corporations. This tax ensures that individuals, partnerships, and other unincorporated entities operating within the city contribute to the local tax base. The UBT applies to various trades, professions, and occupations generating income in New York City.

Understanding the NYC Unincorporated Business Tax

The New York City Unincorporated Business Tax (UBT) is levied on the net income of businesses that are not organized as C corporations or S corporations. This includes sole proprietorships, partnerships, and limited liability companies (LLCs) that are not taxed as corporations. Freelancers and independent contractors conducting business in New York City are also subject to the UBT if they meet certain income thresholds. The tax applies to the income generated from business activities within the city, such as selling goods or providing services.

The UBT is imposed at a rate of 4% on the taxable income allocated to New York City. Businesses with gross income exceeding a certain threshold, such as $95,000, are generally required to file an Unincorporated Business Tax Return (Form NYC-5UB or NYC-5UBTI). While the UBT is an entity-level tax, individuals who are New York City residents and sole proprietors or partners may receive a credit against their personal income tax for a portion of the UBT paid.

Deductibility on Federal Income Tax

The New York City Unincorporated Business Tax (UBT) is generally deductible on federal income tax returns. It is considered an ordinary and necessary business expense, which aligns with federal tax principles allowing deductions for expenses incurred in carrying on a trade or business. Internal Revenue Code Section 162 permits the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Additionally, Internal Revenue Code Section 164 allows a deduction for certain taxes paid or accrued, including state and local income taxes, which encompasses taxes like the UBT. Because the UBT is imposed on the net income of an unincorporated business, it functions similarly to a state or local income tax for federal deductibility purposes. This means that the UBT paid reduces the overall taxable income of the business for federal tax calculations.

Claiming the Deduction on Federal Returns

The method for claiming the NYC UBT deduction on a federal tax return varies by business structure. Sole proprietors typically report the UBT paid as an expense on Schedule C (Form 1040), Profit or Loss from Business. It can be listed under “Taxes and licenses” or “Other expenses,” reducing the business’s net profit.

Partnerships, including many LLCs taxed as partnerships, deduct the UBT at the entity level on Form 1065, U.S. Return of Partnership Income. This deduction reduces the partnership’s ordinary business income before it flows through to individual partners via their Schedule K-1s. For S corporations, the UBT is deducted at the corporate level on Form 1120-S, U.S. Income Tax Return for an S Corporation, similarly reducing income passed through to shareholders. If the UBT relates to rental income, it may be deductible on Schedule E (Form 1040), Supplemental Income and Loss.

Federal Limitations on State and Local Tax Deductions

While the NYC UBT is generally deductible as a business expense, its ultimate benefit for individual taxpayers can be influenced by the federal limitation on state and local tax (SALT) deductions. The Tax Cuts and Jobs Act of 2017 introduced a temporary cap on the amount of state and local taxes that individuals can deduct on their federal income tax returns. This cap limits the total deduction for state and local income, sales, and property taxes to $10,000 per household ($5,000 for married individuals filing separately).

For tax years 2025 through 2029, this cap is temporarily increased to $40,000 per household, with a phaseout for taxpayers with modified adjusted gross income over $500,000. This higher limit will revert to the $10,000 cap in 2030. Although UBT is a business expense, for individuals operating pass-through entities, the UBT paid can contribute to this overall SALT cap if it flows through to their personal tax return and they itemize deductions on Schedule A. However, certain state-level pass-through entity (PTE) tax workarounds allow the entity to pay the state tax at the entity level, which can be fully deducted federally, bypassing the individual SALT cap.