Taxes Galore
There are so many things that New York City has in abundance. Some are good while others are less desirable. It often depends upon whom you ask. One item that will certainly find its way into both categories is taxes – again, it’s a matter of perspective.
While many investors, business owners, workers, and retirees generally consider taxes an abomination, others see them as vital to a functioning society that, under the oversight of its elected representatives, provides a range of public services and a comprehensive social safety net.[i]
Many City residents who fall into the latter category are strongly supportive of all the taxes the City has to “offer” because these “involuntary contributions” – nearly all of which, they believe, should come from the wealthy[ii] – to the public fisc underwrite most of the above-referenced services.
Increased Costs – Choices
Over the years, as the cost for these services has increased, the City has been forced to choose from among the following alternatives: (i) increasing its tax revenue; (ii) borrowing funds (i.e., increasing its debt burden, which must be serviced); or (iii) cutting out, or reducing the scope of, services provided.
As we’ll see shortly, the City recently decided to retroactively increase the tax burden of certain resident individuals[iii] who are directly or indirectly engaged in business in the City, but without changing the rate at which the tax in question is imposed.
More impressively, the City effectuated this change without attracting a lot of attention, in contrast to the newly enacted property tax imposed upon certain residential properties (“second homes” or “pieds-a-terre”) that are beneficially owned by nonresidents.[iv]
Before delving into the revised business tax referenced above, let’s consider the various taxes imposed by the City, including the subject of today’s post, and their relative standing in the hierarchy of City taxes.
A Sampling
Among the City’s many taxes, in decreasing order of their approximate relative importance to the City’s annual budget, are the following: (i) real property taxes (44% of tax revenue), (ii) personal income tax and pass-through entity tax (23%), (iii) sales and use taxes (13.2%), (iv) general corporation tax (8.8%), (v) unincorporated business tax (4.2%), (vi) real property transfer tax (1.6%), (vii) commercial rent tax (1.2%), (viii) mortgage recording tax (1%), and (ix) hotel, utility, cigarette, and other taxes (3%).
The UBT
Of the taxes identified above, the unincorporated business tax (the “UBT”) is perhaps the most unique feature of the City’s business tax landscape; it is also one that often surprises business owners who are not familiar with the City’s tax scheme.[v]
The UBT, which accounts on average, for just over 4 percent of the City’s annual tax revenue, is imposed on the unincorporated business taxable income (“UBTI”)[vi] of every unincorporated business that is wholly or partly carried on within the City.[vii]
The tax is – and has been since 1966 – imposed at a rate of 4 percent of a taxpayer’s UBTI.[viii]
Taxable Passthrough Entities
Any individual or unincorporated entity that carries on a trade, business, profession or occupation wholly or partly within the City, and has a total gross income from all such businesses, regardless of where carried on, of more than $95,000 (prior to any deduction for cost of goods sold or services performed), must file an Unincorporated Business Tax Return with the City.[ix]
Unincorporated
An “unincorporated business” means any trade or business conducted or engaged in by an individual (a sole proprietorship) or unincorporated entity, including a partnership.[x] A limited liability company (“LLC”) that is wholly-owned by an individual, and which has not elected to be taxed as a corporation for Federal income tax purposes,[xi] is disregarded as an entity separate from its owner for purposes of the Federal and State income taxes, but any business operated through the LLC is considered a potentially taxable sole proprietorship for UBT purposes.[xii]
Each of these entities is treated as a passthrough entity[xiii] for purposes of Federal, State and local personal income taxes; the entity does not pay an entity-level income tax but, instead, passes its income through to its owners, who include it in their gross income for purposes of determining their own income tax liability.
“Trade or Business”
Where there is doubt as to the status of an activity as a trade or business for purposes of the UBT, all the relevant facts and circumstances must be considered in determining whether the activity constitutes such a trade or business. Generally, the continuity, frequency and regularity of activities (as distinguished from casual or isolated transactions), and the amount of time and resources devoted to the activity are the principal factors to be considered.
If an individual or an unincorporated entity carries on two or more unincorporated trades or businesses in the City, all such businesses will be treated as one unincorporated business for purposes of the UBT.[xiv]
In addition, an unincorporated entity will be treated as carrying on any trade or business carried on, in whole or in part in the City, by any other unincorporated entity in which the first unincorporated entity owns an interest (a tiered structure); for example, where a single member LLC that is disregarded for income tax purposes owns an interest in a partnership that is engaged in a trade or business in the City.[xv]
Personal Income Tax Means Double Tax
As stated earlier, the UBT is an “entity-level” tax that is payable by the business as such,[xvi] as distinguished from a tax that is payable by its owners in their individual capacity on their share of the entity’s income whether or not it is distributed to them.
However, because of an unincorporated entity’s passthrough nature for income tax purposes,[xvii] its taxable income is not only subject to the entity-level UBT, but is also accounted for in determining the personal income tax imposed by the City on an individual City resident who is a member of the unincorporated entity.[xviii]
Thus, in the case of a City resident who is a sole proprietor, or a partner in a partnership, or a member of an LLC, that engages in a trade or business in the City, such resident individual’s share of the entity’s UBTI – which has already been taxed under the City’s UBT – will also be included in the resident-owner’s personal taxable income for purposes of determining their income tax liability to the City,[xix] thereby exposing such taxable income to double taxation by the City.
The Credit
Thankfully, the City allows a credit[xx] to an individual resident-owner against their personal income tax liability for at least some of the UBT paid by the sole proprietorship or tax partnership in respect of its income that is included in the owner’s taxable income.[xxi]
Unfortunately, though, the amount of the credit allowed is reduced as the resident’s taxable income increases.[xxii]
Specifically, prior to this calendar year (2026), (a) for City residents whose taxable income was not more than $42,000, the credit was equal to 100% of the resident’s share of UBT paid by the business for its tax year ending within or at the same time as the resident’s tax year; (b) for City residents whose taxable income was more than $42,000 but not more than $142,000, the allowable credit was phased down by subtracting from 100% a percentage determined by subtracting $42,000 from taxable income, dividing the result by $100,000 and multiplying by 77%; and (c) for residents with taxable income over $142,000 the credit was equal to 23% of the resident’s share of UBT paid by the business for its tax year ending within or at the same time as the resident’s tax year.[xxiii]
Right about now, some of you may be thinking, “UBT and personal income tax – in most cases, with less than a 100 percent credit? Outrageous!”
What if I told you that it just got worse?
Increasing the Income Tax by Reducing the Credit
On July 16, 2026, the City Council’s Committee on Finance considered a bill “to amend the administrative code of the city of New York, in relation to decreasing the credit against the city personal income tax on residents for such residents’ share of city unincorporated business tax paid by partnerships in which such residents are partners or businesses of which such residents are proprietors.”[xxiv]
Retroactive Effect
One month later, on August 18, the proposed legislation was enacted[xxv] with immediate effect and “retroactive to and deemed to have been in effect as of January 1, 2026.”
Lovely, isn’t it?
The Amendment
The new law[xxvi] (a) decreased the percentages of the allowable credit for taxable years beginning on or after January 1, 2026, for City residents with city taxable incomes of at least $1 million, while (b) maintaining the existing allowable credit for residents with taxable incomes under $1 million.
Specifically, the legislation modified the credit as follows:
- for residents with “city taxable income”[xxvii] of at least $142,000 but less than $1 million,[xxviii] the credit remains equal to 23% of the resident’s share of UBT paid by the business entity for its tax year ending within or at the same time as the resident’s tax year;
- For residents with city taxable income of at least $1 million but less than $1.25 million, a declining credit (basically, a (sliding scale from 23% to 15%) would be computed by subtracting from 23%, a percentage determined by subtracting $1 million from taxable income, dividing the result by $250,000 and multiplying by 8%; and
- for residents with taxable income of $1.25 million or more, the credit would equal 15% of the resident’s share of UBT paid by the business entity for its tax year ending within or at the same time as the resident’s tax year.[xxix]
In other words, a City resident with at least $1.25 million of taxable income will be taxed twice on a greater portion of their share of the UBTI of an unincorporated passthrough business entity: first, the 4% UBT imposed on the business entity’s UBTI and paid by the entity; and, second, the 3.876% City personal income tax imposed on the individual resident member’s share of the business entity’s UBTI.
What’s Going On?
There’s a lot to digest here.
First and foremost, by reducing the amount of the credit that may be claimed against their liability for City personal income tax – from 23% to as low as 15% of the UBT paid by an unincorporated business entity of which they are a member – the new law effectively increases the individual income tax rate applicable to higher income City residents.
Second, as a tax payable by the unincorporated business, the UBT will continue to be treated as a deductible expense of the business[xxx] – not subject to the limitation on the deduction of state and local income taxes for purposes of determining an individual’s Federal income tax liability – thereby reducing the amount of the individual owner’s or member’s share of the UBTI.[xxxi]
Silver Linings?
As undesirable as the foregoing tax increase is, there are certain ameliorative factors to consider, without which the outcome could have been worse.
According to the IRS,[xxxii] in enacting the so-called “cap” on the itemized deduction for state and local taxes (“SALT”),[xxxiii] Congress provided that “taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s . . . distributive . . . share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s . . . distributive . . . share of income as under present law.”[xxxiv]
Thus, the UBT paid by a tax partnership will reduce the amount of a resident partner’s (or member’s) distributive share of the entity’s income.[xxxv]
Moreover, an eligible tax partnership (but not a sole proprietorship) may elect to pay the City’s entity-level passthrough entity tax, which will enable a resident member of the tax partnership to deduct, in effect, the member’s City personal income tax attributable to the member’s share of the partnership’s income, notwithstanding the limitation on SALT deductions for purposes of determining such member’s individual Federal income tax liability.[xxxvi]
Opening Salvos
The City’s mayor from the DSA, whose term began on January 1 of 2026, can already chalk up two tax wins against some of the “wealthy” individuals who do business, or own real property, in the City. The first – described above – applies to individuals who are residents of the City; the second – the pied-a-terre tax – applies to nonresidents.
In November of this year, all 63 seats in the progressive New York State Senate and all 150 seats of the even more progressive Assembly will be up for election; the Democrats currently have a 41-22 majority in the Senate, and a 103-47 majority in the Assembly.
Similarly, all 51 seats of the City Council are up for election; the Democrats have a majority of 46-5.
Finally, the governor (a Democrat) is also running for re-election.
While the governor has said that she is opposed to increasing state income taxes on individuals – she has fewer reservations when it comes to businesses – the two chambers of the state legislature have for many years been pushing for increases not only to the state income tax, but also to its estate tax. To override the governor’s veto of a bill requires two-thirds of the members of each house. That appears to require the removal of just one Republican from the State Senate.
Although the Democrat-controlled legislature has been reluctant, historically, to override their same-party governor, the composition of the party’s members in Albany may signal a significant change. As one lobbying firm observed:
“New York’s 2026 state and federal primaries represented a significant shift in the direction of the Democratic party in New York, and serves as a bellwether of where the party is headed nationally. What once might have been thought of an anomaly, broad swaths of voters showed up and supported Democratic Socialists of America (DSA) candidates and largely rejected established non-DSA Democratic candidates and incumbents.”[xxxvii]
Depending upon the outcome of this year’s elections, the mayor may find he has the political backing in Albany to campaign for substantial increases in the income tax.[xxxviii]
Stay tuned.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
Sign up to receive my blog at www.TaxSlaw.com.
[i] If these two camps were represented on a Venn Diagram, the overlapping space would generally include those who agree that certain public services are necessary and should be funded through taxes, many other services are wasteful or are not properly within the purview of government and should be eliminated, and the funds collected as taxes are too often entrusted to incompetent or corrupt public officials with easily foreseeable outcomes.
[ii] The so-called “wealthy” already bear a disproportionately large share of these costs. They also provide the lion’s share of support for many charitable endeavors. See https://www.taxslaw.com/2025/12/obbba-and-the-self-imposed-tax-known-as-charitable-giving/.
[iii] The City may not tax the income of nonresidents.
[iv] https://www.jdsupra.com/legalnews/does-the-pied-a-terre-tax-apply-to-real-4714254/.
[v] The City’s UBT was adopted in 1966. The State repealed its unincorporated business tax at the end of 1982.
[vi] Assuming a taxpayer is engaged in a taxable unincorporated trade or business within the City, the UBTI of such unincorporated business for a taxable year is equal to its unincorporated business gross income for such year that is allocated to the City, less its unincorporated business deductions for the year. N.Y.C. Adm. Code Sec. 11-505.
In general, the term “unincorporated business gross income” is the sum of the items of income and gain of the business includible in the entity’s gross income for Federal income tax purposes (with certain modifications), including income and gain from any property employed in the business, or from the sale or other disposition by an unincorporated entity of an interest in another unincorporated entity if, and to the extent, such income or gain is attributable to a trade or business carried on in the City by such other unincorporated entity. N.Y.C. Adm. Code Sec. 11-506.
The unincorporated business deductions of an unincorporated business generally include the items of loss and deduction directly connected with, or incurred in the conduct of, the business, which are allowable for Federal income tax purposes for the taxable year, with certain modifications (for example, guaranteed payments described in IRC Sec. 707(c) that are made by a partnership to a partner for services or for the use of capital are not deductible for purposes of the UBT). N.Y.C. Adm. Code Sec. 11-507(3).
[vii] If an unincorporated business is carried on both within and without the City, a portion of its business income must be allocated to the City; the portion so allocated is subject to the UBT, while the portion allocated outside the City escapes the UBT. N.Y.C. Adm. Code Sec. 11-508.
For taxable years beginning after 2017, the City adopted a single factor based on gross income for purposes of determining the portion of an unincorporated entity’s business income that was allocable to the City.
[viii] N.Y.C. Adm. Code Sec. 11-503.
[ix] N.Y.C. Adm. Code Sections 11-514(a)(4) and 11-506(a)(1); Form NYC-202.
[x] N.Y.C. Adm. Code Sec. 11-502. Of course, this generally includes an LLC with two or more members. We’ll sometimes refer to such an LLC and state law partnership, in the aggregate, as a “tax partnership.”
[xi] Reg. Sec. 301.7701-3.
[xii] N.Y.C. Adm. Code Sec. 11-502.
[xiii] Even though an S corporation is described as a passthrough entity for most income tax purposes, it is not subject to the UBT because it is a state law corporation or an otherwise “eligible” entity that has elected to be treated as an S corporation. Because New York City does not recognize the Federal or State “S” election, the corporation is subject to the City’s general corporation tax.
[xiv] N.Y.C. Adm. Code Sec. 11-502.
[xv] N.Y.C. Adm. Code Sec. 11-502(a).
[xvi] N.Y.C. Adm. Code Sec. 11-503(a).
[xvii] Its default status under Reg. Sec. 301.7701-3.
[xviii] Compare the Federal and New York State income taxes, which are not imposed at the level of the passthrough entity itself.
That being said, an eligible partnership may elect to pay New York’s and New York City’s passthrough entity taxes, which effectively enables its individual NYC resident partners to deduct their state and local income tax liability attributable to their share of partnership income, notwithstanding the limitation on itemized deductions for such taxes for purposes of determining their individual Federal income tax liability.
Sole proprietorships and single member LLCs that are disregarded for Federal income tax purposes cannot elect to pay the passthrough entity taxes.
[xix] It should be noted, however, that not every unincorporated business conducted within the City is subject to the UBT.
For example, an individual or other unincorporated entity is generally not treated as engaged in an unincorporated business solely by reason of (A) the purchase, holding and sale of property (“property” generally means real and personal property, including, for example, stocks or bonds) for their or its own account, (B) the acquisition, holding or disposition, other than in the ordinary course of a trade or business, of interests in unincorporated entities that are themselves acting for their own account, or (C) any combination of such activities. N.Y.C. Adm. Code Sec. 11-502.
In addition, an owner of real property, or a lessee of such property, will not be deemed engaged in an unincorporated business solely by reason of holding, leasing or managing real property.
Moreover, if an owner or lessee who is holding, leasing or managing real property, is also carrying on an unincorporated business in the City, whether or not such business is carried on at, or is connected with, such real property, such holding, leasing or managing of real property will generally not be treated as an unincorporated business if, and to the extent that, such real property is held, leased or managed for the purpose of producing rental income from such real property or gain upon the sale or other disposition of such real property. N.Y.C. Adm. Code Sec. 11-502.
[xx] N.Y.C. Adm. Code Sec. 11-1706(c).
[xxi] Insofar as the State income tax is concerned, UBT that was deducted in arriving at an individual’s Federal adjusted gross income must be added back by the individual to determine their New York State adjusted gross income.
[xxii] N.Y.C. Adm. Code Sec. 11-1706(c).
[xxiii] N.Y.C. Adm. Code Sec. 11-1706(c)(2)(A)(ii).
[xxiv] Int. No. 972. Actually, a so-called “Preconsidered Introduction” – basically a draft bill that has not yet been introduced to the full City Council but is already being evaluated by one of its committees.
[xxv] Law Number 2026/133. The vote was 43 to 6. I’ll let you guess.
[xxvi] N.Y.C. Adm. Code Sec. 11-1706(c)(2)(A)(iii).
[xxvii] N.Y.C. Adm. Code Sec. 11-1711(a).
[xxix] According to the City Council’s Finance Division, it is estimated that this legislation will increase revenues from the City personal income tax by $33.5 million for the second half of Fiscal 2026 and by $67 million annually beginning in Fiscal 2027. https://legistar.council.nyc.gov/LegislationDetail.aspx?ID=8134075&GUID=06817937-0C5A-4CDF-83AF-0C3F9C7CCD15.
This will be added to the new revenue arising from the pied-a-terre tax, which the Mayor has initially estimated would be approximately $500 million annually, but which the City Comptroller subsequently adjusted to approximately $380 million. https://comptroller.nyc.gov/reports/the-pied-a-terre-tax-and-its-potential-revenues/.
Hardly enough to cover the expenditures desired by the mayor – keep that in mind.
[xxx] Much the same way as the elective passthrough entity taxes are.
[xxxi] For an analogous situation, see IRC Sec. 1366(f)(2), which reduces the pass-through of S corporation income to its shareholders by the amount of entity-level built-in gain tax paid by the S corporation under IRC Sec. 1374.
[xxxii] Notice 2020-75.
[xxxiii] IRC Sec. 164(b)(6). P.L. 115-97.
[xxxiv] H.R. Rep. No. 115-466, at 260 n. 172 (2017).
[xxxv] Query whether the outcome should be the same in the case of the UBT paid by a sole proprietorship or by a single member LLC that is disregarded for individual income tax purposes.
[xxxvi] Art. 24B of the New York Tax Law (Sec. 867 et seq.); N.Y.C. Adm. Code Sec. 1706(g) provides a credit for an individual resident taxpayer’s share of the passthrough entity tax paid by the tax partnership of which such individual is a member.
The UBT and the PTET are separate tax regimes, the federal impact of which enables an individual partner to “circumvent” the cap on the deduction of SALT.
[xxxvii] https://www.brownweinraub.com/post/new-york-state-2026-legislative-primary-results.
[xxxviii] The State determines income tax policy for the City; this is in contrast to policy for the City’s UBT, which is set by the City Council and the mayor.