New York City imposes an Unincorporated Business Tax (UBT) on individuals and unincorporated entities - partnerships, LLCs treated as partnerships, and sole proprietors - that carry on a trade or business in New York City. The UBT is separate from New York State and New York City personal income tax. At a 4% rate on net income from the business, it is a meaningful additional tax on NYC-based professional services, consulting, and other pass-through businesses. It is also one of the most misunderstood taxes in the city - many practitioners who advise NYC-based businesses do not fully account for its impact on net after-tax income or take advantage of its significant exemptions.
Who pays: Any individual or unincorporated entity (partnership, LLC, sole proprietor) that is engaged in a trade or business in New York City - regardless of the owner's residence. A New Jersey resident who is a partner in a NYC law firm partnership has UBT exposure on their share of partnership income from NYC business activity.
Rate: 4% of unincorporated business taxable income.
Exemption: A specific exemption of $5,000 applies against net business income, and a partnership must file only if total gross income exceeds $95,000. A business tax credit also covers the full tax when it is $3,400 or less (phasing out by $5,400), so small businesses and startups may owe no UBT at all.
Credit: NYC residents who pay UBT receive a credit against their NYC personal income tax: 100% of the UBT at city taxable income of $42,000 or less, phasing down to 23% at $142,000 or more. The credit cannot exceed NYC personal income tax and is not refundable or carried over, so it reduces but does not eliminate the UBT burden for higher-income NYC residents.
UBT applies to income from a trade or business carried on in NYC. Pure investment income is excluded - a partnership that holds stocks and bonds and earns dividends and interest is not engaged in a trade or business and owes no UBT. The key question is whether the entity is conducting a business or merely managing investments. The NYC Department of Finance applies a facts-and-circumstances test that looks at: frequency and regularity of transactions, whether the entity holds itself out as conducting a business, whether services are provided beyond mere investment oversight, and whether income is derived from the active provision of services or goods.
Law firms, accounting firms, consulting partnerships, architecture firms, and other professional services businesses operating in NYC through partnerships or LLCs are fully subject to UBT. For a profitable professional services partnership with $10 million of NYC-sourced business income, the UBT exposure is approximately $400,000 (4% x ($10,000,000 - $5,000)). Partners who are NYC residents with city taxable income of $142,000 or more receive a 23% credit against their NYC personal income tax, reducing their effective UBT cost to approximately 3.08% (4% x 77%) of their share. Non-NYC-resident partners receive no credit and bear the full 4% UBT.
A corporation doing business in NYC pays the NYC Corporate Tax (8.85% for most corporations) rather than the UBT. A partnership or LLC pays UBT at 4%. For very profitable businesses, the differential makes the partnership/LLC form significantly more tax-efficient at the NYC level - even though the NYC corporate tax may allow certain deductions the UBT does not. Many NYC professional firms deliberately maintain partnership form to access the lower UBT rate rather than converting to corporate form for liability reasons. The decision involves analyzing both the NYC tax rate differential and the liability exposure at the owner level.