The New York City Unincorporated Business Tax

The New York City Unincorporated Business Tax, or UBT, is a tax applied to the net income of businesses that operate as unincorporated entities within the city. This includes business structures such as sole proprietorships, partnerships, and certain limited liability companies (LLCs). The tax is levied on the profits from any trade, profession, or occupation conducted or liquidated within the five boroughs. Its function is to tax business income that is not subject to the city’s General Corporation Tax.

If an individual or entity operates more than one unincorporated business, all are consolidated and treated as a single entity for UBT purposes, with their income and deductions combined on one return. The UBT is an entity-level tax, distinct from the personal income tax paid by business owners, though mechanisms exist to mitigate double taxation.

Determining UBT Applicability

The UBT applies to any individual or unincorporated entity engaged in a trade, business, or profession wholly or partly within New York City. The tax is triggered by carrying on business activities with a degree of regularity in the city, and a physical office is not required. A primary factor in applicability is whether an individual is an employee or an independent business. Performing services as an employee is exempt from the UBT.

This distinction is based on criteria of behavioral control, financial control, and the relationship of the parties. If a worker controls how their work is accomplished, they are more likely to be considered an independent business subject to the tax.

Certain activities are also exempt. An individual or entity whose sole activity is holding, leasing, or managing real property for their own account is not subject to the tax. Likewise, individuals or entities, other than dealers, engaged exclusively in buying and selling property for their own account are exempt.

A professional exemption is available to sole proprietorships and single-member LLCs, but not to partnerships. To qualify, the business must be in a profession like law, medicine, or architecture, where over 80% of gross income comes from the owner’s personal services and capital is not a material income-producing factor.

Calculating Unincorporated Business Taxable Income

The calculation of UBT taxable income begins with the business’s federal gross income, derived from a federal tax return like a Schedule C. From there, specific modifications required by New York City law are made to arrive at unincorporated business gross income, which includes all income connected to the business. From this amount, allowable unincorporated business deductions are subtracted. These are the ordinary and necessary expenses connected with the business, similar to federal rules.

However, no deduction is allowed for payments made to a proprietor or partner for their services or use of capital, meaning owner salaries are added back to income. Businesses operating both inside and outside New York City must allocate a portion of their income to the city. This allocation is based on a receipts factor, which sources receipts to where the service or activity is performed.

After determining the net income allocated to the city, a statutory exemption of $5,000 is allowed. This exemption must be prorated if the business operates for less than a full year. The remaining amount is the unincorporated business taxable income.

Computing and Reducing the Final Tax

The tax is calculated by applying a flat rate of 4% to the unincorporated business taxable income. This results in the initial tax liability before any credits are applied. Credits reduce the final tax owed on a dollar-for-dollar basis. A primary UBT credit is available for businesses with lower profits.

If the calculated tax liability is $3,400 or less, a credit is allowed for the full amount of the tax. For tax liabilities between $3,401 and $5,400, a partial credit is available that phases out as the liability increases. Other credits include one for a portion of the General Corporation Tax paid by a partnership in which the business has an interest, and the real estate tax escalation credit for commercial tenants.

New York City residents can also claim a credit against their city personal income tax for the UBT they paid. The amount of this resident credit depends on the individual’s city taxable income. For those with a city taxable income of $42,000 or less, the credit is 100% of the UBT paid.

This percentage decreases for incomes between $42,000 and $142,000. For incomes of $142,000 or more, the credit is 23% of the UBT paid.

Filing and Paying the UBT

UBT compliance involves annual filings and often quarterly estimated payments. Individuals and single-member LLCs file Form NYC-202, while partnerships file Form NYC-204. These annual returns are used to report business income and deductions and to calculate the final tax liability. Annual return due dates vary by business type. For partnerships, the return is due March 15 for calendar-year filers, while for individuals and single-member LLCs, the due date is April 15.

If a business expects to owe $1,000 or more in UBT for the year, it must make quarterly estimated tax payments. These are made using Form NYC-5UBTI for individuals or Form NYC-5UB for partnerships. The payments are due on April 15, June 15, September 15, and January 15. Underpayment penalties can result from not paying enough tax through these installments and are calculated on Form NYC-221.

Payments can be submitted electronically or by mail. Payments by check or money order must include Form NYC-200V and be sent to a separate address, not with the annual return. An automatic six-month filing extension can be requested with Form NYC-EXT.