What Tech Companies Need to Know About Commercial Rent Tax (CRT) in NYC—and Why Startups Should Be Extra Cautious

Oct 7, 2024

EARLY-STAGE-STARTUP-TAXES

For tech startups operating in Manhattan, especially those that have recently raised Seed or Series A rounds, the Commercial Rent Tax (CRT) can be an unexpected expense. If you’re leasing office space in Manhattan south of 96th Street and your annual rent exceeds $250,000, you may be liable for this tax. Without the right internal finance processes in place, missing or skipping these filings can result in late penalties, cutting into your newly raised capital.

 

What Is the CRT?

The CRT applies to businesses occupying commercial property in Manhattan, with annual rents of $250,000 or more. Tech companies renting space for their operations—including those that raised capital through Seed or Series A rounds—are often in high-rent areas, putting them at risk of owing this tax.

 

The Impact on Funded Startups

Startups that have just closed a Seed or Series A round often allocate significant funds to growth initiatives like product development, hiring, and marketing. It’s easy to overlook tax compliance, especially something like the CRT, which doesn’t apply until your rent hits $250,000 annually. However, missing these filings can lead to penalties, late fees, and interest that can eat away at your funding. We’ve seen tech companies scale very fast from working out of coworking spaces to renting out entire floors in buildings and the commercial rent tax can be easily missed along the way. 

The CRT filing deadlines are quarterly, which means you need to stay on top of your financial reporting and rent expenses regularly. If you’re not prepared, or if your team is too lean, these filings can be easily overlooked.

 

The Importance of the Right Finance Team

Without the right internal finance team or external advisors in place, it’s easy for growing startups to miss deadlines or misunderstand tax obligations like the CRT. This is particularly true for early-stage tech companies that often focus on scaling quickly, leaving financial operations under-prioritized.

A strong internal finance team—whether it’s a fractional CFO, controller, or even a diligent bookkeeper—can ensure that:

  • CRT filings are done on time.
  • Opportunities for tax credits, like the Small Business Tax Credit, are fully utilized.
  • Your team monitors rent thresholds and stays compliant with all NYC tax laws.

 

Tax Rates and Credits

The CRT tax rate is 6% of the base rent, but businesses receive a 35% reduction on the base, resulting in an effective tax rate of 3.9%. Companies paying annual rent between $250,000 and $300,000 may qualify for a sliding-scale tax credit, reducing their liability.

Additionally, for startups with total income under $5 million and annual rent below $500,000, the Small Business Tax Credit can offer significant relief. However, startups must track both their income and rent meticulously to ensure they’re eligible.

 

The Penalties for Non-Compliance

Failing to file or pay CRT on time can lead to severe penalties. Startups that overlook this can face:

  • Late penalties that accumulate quickly.
  • Interest charges on unpaid taxes.
  • A potential audit, which can divert attention and resources from core business activities.

 

Avoiding CRT Pitfalls

To avoid the financial and operational burden of CRT non-compliance, startups should:

  • Ensure they have knowledgeable finance professionals on their team who understand NYC taxes.
  • Regularly review their rent obligations and income to determine whether they qualify for credits.
  • Set up systems to track and file quarterly CRT returns to avoid late penalties.

 

Lease vs. Sublease: How It Impacts Your CRT Obligations

For tech startups in NYC, whether you’re leasing or subleasing space can significantly impact your Commercial Rent Tax (CRT) obligations. If you’re subleasing a portion of your office to another tenant, you are still responsible for the CRT on the full rent amount, but you can deduct the rent received from your subtenant when calculating your base rent. This could reduce your overall CRT liability. However, if you’re the subtenant in a space, you are directly responsible for the CRT on the rent you’re paying to the primary tenant, as long as your portion exceeds the $250,000 threshold.

For early-stage tech companies, navigating lease agreements and subleases can add complexity, making it essential to properly track these arrangements. Without clear internal financial oversight, companies may either overpay or fail to file correctly, risking penalties. Therefore, ensuring these distinctions are well-managed by your finance team is critical to maintaining tax compliance

 

Takeaway

For tech companies that have just raised a Seed or Series A round, it’s critical to have the right financial team in place to handle tax compliance. The CRT can be an unexpected hit to your cash flow, and the penalties for missing filings can pile up fast. Don’t let your company’s growth be derailed by avoidable tax issues.

Make sure your finance team is up to speed and compliant with all filing requirements so that you can focus on what matters—scaling your business​. Consult your tax advisor and attorney to ensure you are in compliance with these laws. Contact us to learn how we can help you stay compliant with the NYC Commercial Rent Tax (CRT). 

 

Helpful Link: NYC Commercial Rent Tax Landing Page