New York Tax Free Zones
The New York legislature has established a variety of tax free zones to entice start-up to locate in New York State. The general provisions of the tax-free zone are a 0% tax rate for the first ten years. This zero tax rate means no income tax, business tax, corporate tax, state or local taxes, sales or property taxes, or franchise fees. While this sounds like a great deal, not every new business will qualify for the tax-free zone.
To be eligible for the tax-free zone, the company must either be a new company in New York or moving to New York. However, there are specific businesses that are ineligible solely due to the business they engage in. For example, retail and wholesale businesses, restaurants, real estate brokers, law firms, medical or dental practices, real estate management companies, hospitality, finance and financial services, businesses providing personal services, accounting businesses and other types of businesses cannot avail themselves of the tax free zone benefits.
Part of the tax free zone program requires a business partner with a universities academic mission. The school’s academic mission focuses on the programs, research, applied learning opportunities, culture and curriculum of the college or university that is paired with the startup company. The business application process helps startups determine how their unique business can partner with the school. Startups will be required to occupy property affiliated with the public and private colleges and universities participating in the tax free zone program.
Perhaps the greatest incentive is the tax free nature of the program. One of the unique features of the program is that the tax free zone benefits also apply to employees – meaning that employees of the startup will pay no income tax on their wages. There are some limits, so high-earning employees will be taxed after five years. After the ten year tax-free window is completed, the normal tax rates apply to the startup. To apply, a business applies directly to the participating college or university.
While the idea of a tax free zone to stimulate startups seems beneficial, the tax free zone may be too restrictive. The stated goal of the tax free zone problem is to entice high-tech companies. But only those businesses “with 100 percent of their operations … in a tax-free area” would receive a zero tax liability. In other words, where a business has offices both in and out of a tax-free area, the credit would be pro-rated based on the percentage of assets and payroll within the tax-free zone. This, effectively, excludes from a tax-free zone those businesses that sell products online or over the phone to sources outside the zones.
If you are considering forming a startup to take advantage of the tax free zones, you should consult with a competent attorney to ensure you receive the benefit of this program.
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