These can be taxing times for many co-ops and condos, in more ways than one. Ask the small co-op in Chelsea that saw its franchise tax double recently because the board’s accountant noticed that the fair market value had been underestimated.
“I saw that it was not properly shown, and so I adjusted it,” says the accountant, speaking on condition of anonymity. “States and cities are hurting, and they’re going to start looking at any tax that can bring in money. If people put down the value they’ve used all along – the book value – instead of the fair market value, their franchise tax will be too low. I don’t want any client put in a position where they can get audited and whacked.”
The obscure and misnamed “franchise tax” – actually a tax on a co-op’s or condo’s capital – can be especially painful. This is so not because the tax payment itself is especially large, but because some buildings’ fair market value, a key component in computing the tax, have been underestimated in years past. Some accountants, aware that the state and city governments are cash-starved, are raising their estimates of a property’s fair market value in an effort to avoid the unwelcome scrutiny of government auditors.
But staying on the right side of the law, it turns out, is not all that difficult, provided your accountant knows the rules. In simplest terms, the franchise tax is a tax on capital, defined as a corporation’s assets minus its liabilities. “When computing the franchise tax, you must use fair market value instead of book value,” says Carole Newman, a veteran co-op and condo certified public accountant (CPA) and partner at Newman Newman & Kaufman. “This has been the case for at least 20 years.”
She laid out the formula for computing a co-op’s franchise tax:
(1) Establish assets by reading the audited financial statement. This will include such items as property, cash, and accounts receivable.
(2) Subtract the net value of fixed assets, which is the building’s book value (cost at time of purchase) minus depreciation.
(3) Add back the fair market value of the property. For the New York State franchise tax, fair market value is the transitional assessed value of the property (which appears on your annual tax bill) divided by the current equalization rate for the borough or town where the property is located. For the New York City franchise tax, take the actual assessed value of the property (which appears on your annual tax bill) and divide that by the equalization rate for the city, which is 45 percent.
(4) Subtract liabilities, such as mortgage and accounts payable. You now have the amount of capital to be taxed. Multiply it by .0004 and you will have your co-op’s New York City franchise tax. (For condos it is simply assets minus liabilities, multiplied by a tax rate of .0015.)
If this all sounds like Greek to you, then make sure you have a competent and trustworthy accountant who can perform the calculation and then explain it to you. And remember that accounting, for all its precision, is a fluid art. Doug Condon, a CPA in Brooklyn, says that he used recent sales and his own experience to arrive at a fair market value of $4.2 million for a 69-unit Brooklyn co-op. The co-op’s city and state franchise tax bill came to about $1,000. Explains Condon: “I just have a feel for what the state and city will accept.”