Small Business: Rent Expenses May Be Tax-deductible

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If you’re a small business owner who is just starting out, you may not realize that some rent expenses may be deductible on your tax return. Here are some things small business owners should keep in mind when it comes to deducting rental expenses:

How Rent is Defined

Rent is any amount paid for the use of property that a small business doesn’t own. Typically, rent can be deducted as a business expense when the rent is for property the taxpayer uses for the business.

Lease or Purchase

  • Sometimes a business must determine whether its payments are for rent or for the purchase of the property, because different tax rules may apply.
  • Businesses must first determine whether an agreement is a lease or a conditional sales contract.
  • Payments made under a conditional sales contract aren’t deductible as rent expenses.

Unreasonable Rent

Businesses can’t take a rental deduction for unreasonable rent paid. Rent is unreasonable for deduction when it is higher than market value or a professional appraisal.

  • Usually, unreasonable rent becomes a problem when business owners and the lessors are related.
  • Rent paid to a related person is reasonable if it’s the same amount a business owner would pay to a stranger for the use of the same property. The definition of a related person is not limited to family members. Please call for more information.

Office in the Home

A business owner’s workplace can be in their home if they have a home office that qualifies as their principal place of business.

  • Business owners who rent their home and have a home office as their principal place of business may also qualify for a deduction.
  • IRS Publication 587, Business Use of Your Home, Including Use by Daycare Providers, has more details about this deduction.

Rent Paid in Advance

Rent paid for a business is usually deductible in the year it is paid.

  • If a business pays rent in advance, it can deduct only the amount that applies to the use of the rented property during the tax year. The business can deduct the rest of the payment over the period to which it applies.
  • Business owners can review Publication 535, Business Expenses, for detailed examples of rent paid in advance.

Canceling a Lease

A business can usually deduct the costs paid to cancel a business lease.

Questions?

If you have any questions about whether rental expenses are tax deductible for your small business, please contact the office.

Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.