If you missed the first eight parts of our guide to deductible business expenses, you can find them below:
Did you know that you may be able to deduct rent as a business expense? Read on for more information.
Rent is defined as any amount paid for the use of property that you do not own. Generally, rent is deductible as a business expense if the rented property is used in the course of your trade or business.
If you have or will receive equity in or title to a rented property, rent on that property is not deductible.
I run my business from a home office. Can I deduct my home’s rent as a business expense?
You may be eligible to deduct a portion of your home’s rent if your home office meets the IRS’s requirements for business use of your home. Specifically, part of your home must meet the criteria for exclusive and regular use, as discussed in our previous blog post on the home office deduction.
Can I deduct rent as a business expense if it is paid in advance?
Generally, rent paid for business use of property may only be deducted in the year paid or incurred.
If your business employs the accrual-based method of accounting and pays rent in advance, you may only deduct the amount of rent applicable to that year. The rest of the rent may be deducted during the year to which it applies.
If you use a cash-based method of accounting for your business, you may deduct the entire amount of prepaid rent in the year of payment so long as the payment is for the use of the property within the earlier of either:
12 months after the first date you have the right to use the property, or
The end of the tax year following the year in which you paid the advance rent.
Payment applicable to the period beyond these limits must be deducted over the period to which it applies.
Does the cancellation of a lease count as a deductible business expense?
Are payments under a conditional sales contract deductible as a rent expense?
It’s important to determine whether your payments are for rent, as through a lease, or for the eventual ownership of a property, as in a conditional sales contract. Payments made under the latter are not deductible as a rent expense because under a conditional sales contract, the buyer takes eventual possession of the property’s title; as discussed earlier, rent is not deductible if you will take eventual possession of equity in the property or the property’s title.
Are there any special IRS rules for leases to be aware of?
Yes. The IRS provides special rules for a lease if it requires total payments over $250,000 and any of the following apply:
Rent increases or decreases during the lease
Rent is deferred to the following calendar year
Rent is prepaid during the calendar year before use of the property occurs
Generally, if the special rules apply to your rental situation, your business must use an accrual method of accounting.
If your business’s lease specifies equal amounts of monthly rent and all payments are due in the calendar year of the lease, the special rules generally do not apply to your lease.
Can I deduct taxes paid on leased property as additional rental expense?
Generally, yes, you can deduct any taxes you pay to or for the lessor. However, when you are able to deduct these taxes as additional rent depends on which accounting method your business uses.
If your business uses a cash method of accounting, you can deduct the taxes as rent only for the year in which you pay them.
If you use an accrual accounting method, however, your business may only deduct the taxes as additional rent for the tax year in which you can determine the following:
That you are responsible for paying taxes on the leased property.
How much in taxes you owe for that property.
That economic performance occurred for your business.
I had to pay extra costs in order to get an existing lease from another lessee. Can I deduct that cost as a rent expense?
Generally, yes, but you must amortize that amount over the remaining term of the lease.
For example, if you pay $10,000 for an existing lease with ten years remaining on the lease, you are permitted to deduct $1,000 per year.
In conclusion, business deduction of rental expenses can be a complicated subject; however, it is worth determining which rental deductions your business is eligible to claim. For more information on this topic, contact your CPA.