If there is one thing we know about San Francisco, it is that it is expensive. It is expensive to live there. It is expensive to shop there. And it can be very expensive to do business in the City.
Indeed, the notoriously high cost of doing business in San Francisco has been cited over the past few years by dozens of major corporations fleeing the City for greener pastures. However, in many ways, it is the City’s small businesses that have been hit the hardest because they cannot afford to absorb the costs like a large corporation nor can they afford to move. Nonprofits, too, are being squeezed by the high costs in the City without many good options.
Ultimately, the high cost of commercial rents or labor in the City are unavoidable. However, many of San Francisco newest tax ordinances on businesses sympathize with small businesses and nonprofits by excluding them from some of these additional costs. With that in mind, here are the major tax exemptions that San Francisco small business and nonprofit leaders feeling the strain should be aware of.
Gross Receipts and Payroll Taxes
San Francisco business owners will recall the City’s Gross Receipts Tax, passed in 2012, places anywhere from a 0.075% to 0.650% tax rate on companies that do business in San Francisco, depending on the company’s type of business activities and the amount of its taxable gross receipts. Companies with gross receipts from business activities conducted both inside and outside San Francisco must additionally allocate or apportion its total gross receipts to the City, according to the rules set forth in the Business and Tax Regulations Code. These rules may require businesses to take into account both business property locations and payroll expenses when computing how much of its total gross receipts to allocate or apportion to the City to determine the amount of tax owed.
According to the City’s Code, payroll expenses generally include compensation paid to, on behalf of, or for the benefit of an individual, including shareholders of a professional corporation or an LLC. Examples include salaries, wages, bonuses, commissions, issuance or transference of property in exchange for the performance of services (i.e., stock options), and compensation for services paid to the owners or members of pass-through entities.
However, if your business has less than $320,000 in taxable San Francisco payroll expense or $1,170,000 in taxable gross receipts for the year, and your business is not a lessor of residential real estate, you generally do not have to pay a payroll tax or gross receipts tax to the City as a small business — that is, unless you want to make use of one of the many exclusions, such as the clean technology business or the Central Market Street and Tenderloin Area payroll tax exemptions.
If you are uncertain about the amount of tax your San Francisco-based business is paying and think you might qualify for this exemption but have failed to take advantage of it thus far, you should contact John Hayashi to discuss your options.
Early Care and Education Commercial Rents Tax
San Francisco’s Early Care and Education Commercial Rents Tax generally applies to businesses leasing commercial space in the City including subleases. The tax is levied at two rates, depending on the category of space leased. There is a 1% tax on amounts a business receives from the lease or sublease of warehouse space. The rate is generally 3.5% on all other commercial spaces.
Because it imposes taxes on the amounts businesses receive from a lease or sublease, this new tax, which came into effect in 2019, is an additional gross receipts tax, and is separate from the existing gross receipts and payroll expense taxes. And while the tax is levied on landlords, many lease agreements end up just passing through the tax to the lessee as an additional common area maintenance (CAM) charges or something similar, to effectively increase rent expense for businesses by either 1% to 3.5%.
However, the tax generally does not apply to businesses or other organizations exempt from gross receipts and payroll expense taxes. Additionally, commercial space leased for certain uses, including industrial use, arts activities, and retail sales or service activities and establishments other than formula retail (e.g., chain stores), are exempt from this new tax.
Because it is the landlord who directly pays the taxes, business or nonprofit leaders who believe their organization is exempt will need to communicate with their landlord to avoid an indirect payment of the tax.
And on a related note, landlords should know they can exclude the reimbursement of San Francisco Property Tax charged to tenants under a triple net lease from the gross rental amount on their Early Care and Education Commercial Rent Tax Return.
Homelessness Gross Receipts Tax
This gross receipts tax, which imposes tax at a rate between 0.175% and 0.690% on businesses with gross receipts in excess of $50 million, also came into effect in 2019. Thankfully, because it only applies to businesses with many millions of dollars in revenue, small businesses do not have to worry about this particular tax. Additionally, large nonprofits will be glad to learn that they may be excluded from this tax as well.
All business leaders should remember the homelessness tax does not apply to receipts that are exempt from the gross receipts tax or receipts that are already subject to the Commercial Rents tax.
Other Nonprofit Exemptions
In addition to their exemption from the Homelessness gross receipts tax, nonprofit organizations that are formally exempted from federal taxes under Internal Revenue Code Sections 501(c), 501(d), or 401(a), do not have to pay the gross receipts tax (except on unrelated trade or business activities that are conducted in the City). However, it is only 501(c)(3) organizations that are fully exempt from the Payroll Expense tax. Other nonprofits that have a payroll higher than $320,000 may have to pay the payroll tax on unrelated business income generated within the city.
More Questions? Contact BPM.
Now more than ever, small businesses and nonprofits are being asked to stretch their budgets further. Additionally to make matters even more complex temporarily for small businesses, San Francisco voters this November are being asked to vote whether changes should be made to San Francisco’s system of business taxes next January. Of interest to small businesses are the elimination of the City’s Payroll Expense Tax, reductions in business registration fees for small businesses and an increase in the small business exemption discussed earlier. These reductions are being replaced and funded by increases in Gross Receipts Tax rates for certain business activities and rate increases for the higher tiers of a business’s taxable gross receipts.
That is why BPM is here to help. From identifying opportunities to save on taxes like San Francisco’s payroll and gross receipts tax exemptions, to technology and financial consulting, to outsourced professional services, BPM’s experienced accountants and consultants help your dollars go further. More than just your CPA firm, BPM is a strategic partner in making our client organizations’ visions a reality. To learn more about how BPM can help you, contact us today.