The Unincorporated Business Tax (UBT) is levied on businesses operating within New York City that are not structured as corporations, including sole proprietors, partnerships, and LLCs. While it is difficult to completely avoid UBT if your business operates in NYC and meets the requirements, there are several strategies that can help you reduce or minimize UBT liability. Here are some ways you can potentially avoid or lower the UBT:
Incorporate Your Business
One of the most effective ways to avoid the UBT is to incorporate your business. If you operate as a C Corporation or S Corporation, your business will be subject to the General Corporation Tax (GCT) instead of the UBT. While the GCT has different rates and requirements, it generally does not apply to corporations in the same way that UBT applies to unincorporated entities like sole proprietors and partnerships.
- Benefit: Corporations are not subject to the UBT, and the owners of the corporation (shareholders) are generally not personally liable for the corporation’s debts or taxes.
- Considerations: The decision to incorporate depends on various factors, such as tax planning, business size, and future goals. Incorporation can lead to higher initial setup costs and ongoing administrative requirements, but it can help you avoid UBT.
Restructure Your LLC
If your LLC is treated as a pass-through entity and is engaged in business within New York City, it will be subject to the UBT. However, you may consider restructuring the LLC to be taxed as a corporation rather than a pass-through entity. This option can allow your LLC to avoid UBT by electing corporate taxation.
- Benefit: By electing corporate tax treatment (such as an S Corporation election), your LLC can avoid UBT, provided it meets the requirements for corporate taxation.
- Considerations: Changing the tax classification of your LLC can have tax implications for the owners, so it’s essential to carefully consider the pros and cons before making this decision.
Establish a Business Outside of NYC
If your business is located in New York City but you want to avoid the UBT, you may consider relocating your business activities or establishing a physical presence outside of NYC. Businesses that are not located in the city or do not generate income from within the city may not be subject to NYC taxes, including UBT.
- Benefit: Moving outside the city allows you to avoid UBT entirely if you do not engage in any business activity in NYC.
- Considerations: Relocating your business can involve significant costs and logistical challenges. Additionally, if you continue to conduct business in New York City or maintain a presence there, you may still be subject to other taxes.
Claim Exemptions for Certain Types of Income
There are some exemptions to the UBT that can reduce or eliminate your liability. For example, certain types of income from personal service businesses (such as legal, medical, and accounting services) may be exempt from the UBT if the business meets specific criteria.
- Benefit: If your business qualifies as a personal service business, it may be exempt from the UBT on income derived from those services.
- Considerations: You must meet the specific requirements outlined by NYC tax laws to qualify for these exemptions. Not all personal services qualify, so it’s important to consult with a tax advisor.
Utilize Business Deductions and Credits
If your business is subject to the UBT, there are various deductions and credits that can reduce your taxable income, ultimately lowering your UBT liability. For example, you may be able to deduct certain business expenses, such as:
- Operating costs
- Employee wages
- Rent and utilities
- Other business-related expenses
Additionally, NYC offers various business tax credits that may reduce the amount of UBT owed. These credits vary depending on your business activities and location.
- Benefit: Deductions and credits can help reduce the amount of income subject to the UBT, lowering your tax burden.
- Considerations: It’s essential to keep accurate records of your expenses and consult with a tax professional to ensure that you qualify for all available deductions and credits.
Take Advantage of Small Business Exemptions
Small businesses that earn less than a certain threshold may be exempt from the UBT. If your business qualifies as a small business, you might be able to take advantage of these exemptions to avoid paying the tax.
- Benefit: If your business qualifies as small enough to meet the NYC exemption criteria, you may not be required to pay UBT.
- Considerations: There are income and business activity thresholds that must be met to qualify for these exemptions. A tax professional can help you determine whether your business qualifies.
Conclusion
Avoiding the NYC Unincorporated Business Tax (UBT) may not be entirely possible for all businesses, especially those conducting activities within the city, but there are several strategies to minimize or reduce your UBT liability. Incorporating your business, restructuring your LLC, or relocating outside of NYC can help you avoid the tax altogether. Additionally, claiming exemptions for certain types of income, utilizing deductions and credits, and taking advantage of small business exemptions can further reduce the tax burden.
It’s crucial to work with a tax professional to evaluate your business structure, income, and potential for UBT exemption to ensure you are in full compliance with NYC tax laws while minimizing your tax liability.
