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.
The IRS shares guidance on deducting rental expenses:
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 expense.
Unreasonable rent
Businesses can’t take a rental deduction for unreasonable rents 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 use of the same property.
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 on rent paid in advance.
Canceling a lease
A business can usually deduct the costs paid to cancel a business lease.
More information:
Publication 334, Tax Guide for Small Business
Publication 544, Sales and Other Dispositions of Assets
Publication 583, Starting a Business and Keeping Records
