Can I Write Off Rent as a Business Expense?

May 23, 2024Real Estate, Taxes

If you’re sitting in the rented office of your small business while reading this, you’ve probably asked yourself once or twice, “Can small businesses deduct rent?” Meaning, can you write off rent as a business expense?

The short answer is, “It depends.”

Being able to deduct rent as a business expense depends on whether you meet specific IRS criteria. For example, if you are a business owner and work in a home office, you may be able to claim for the portion of your home office rent. This only applies to business owners with a specific home office, not an employed person working from home.

Again, there is no set answer to whether you can write off rent as a business expense. Typically you can, but first you need to meet certain criteria.

Fortunately, Kimberly Ferguson of Emerald Expectations is here to help figure out if you (in your specific situation) can write off your rent as a business expense. She is an Enrolled Agent (EA) who specializes in working with small business owners to help them maximize their tax deductions and, in doing so, lower the taxes they have to pay.

Click here to learn more about Emerald Expectations’ services.

Small Business Owners’ Guide to Deducting Rent

Home office tax deduction

The IRS allows home office tax deductions provided the business owner meets specific requirements.

In general, expenses related to a person’s home are not deductible. These include utilities, maintenance, rent, and real estate taxes. However, there are some exceptions to this when it comes to people who work from home. If they meet certain criteria, it’s possible to deduct some expenses related to using part of their home for their business, including rent.

Here’s a quick guide from the IRS that can help determine if you can deduct the rent of your home office. Remember, your answers must match the guide below to qualify:

  1. Is part of your home used in connection with your trade or business? Yes.
  2. Are you using part of the home as an employee? No.
  3. Is the use regular and exclusive? Yes.
  4. Is it your principal place of business? If the answer is yes, a deduction is allowed.
  5. If you answered no to number four, do you meet clients, customers, or patients in your home? If yes, a deduction is allowed.
  6. Is it a separate structure? If the answer is yes, a deduction is allowed. If it’s a no, then you cannot take the deduction.

Here are some examples of what kind of business you can be conducting in your home office:

  • Setting appointments
  • Writing reports
  • Forwarding orders
  • Billing customers
  • Meeting patients
  • Maintaining billing records
  • Consulting with clients

In summary, your home office must be your principal place of business to be able to write off rent as a business expense. Even if you also work sometimes in other places, such as another office, a hotel room, or a clinic, your home office can still be qualified for deductions if it is your principal place of business.

When you’ve determined that you qualify for a deduction, you have two methods you can use to figure out how much you can deduct as rent expense.

The first is the simplified method. This method prescribed by the IRS uses the following formula:

  1. Multiply the allowable area used by the business by $5.
  2. Take the income of your business, less other expenses.
  3. You may deduct the smaller of these two numbers, up to $1,500 per year.

There are other details and criteria related to the simplified method, including different details if you use your home as a daycare. To see the complete IRS guide, click here.

The other method is to use your home’s actual expenses. Using this method allows you to deduct the portion of expenses related to your home in your business. You also need to determine whether the expense is direct, indirect, or unrelated as well as the percentage of your home you used for your place of business.

Regarding the rent of your home office, you can deduct part of the rent you pay for the office area. To do this, multiply your rent payments by the percentage of your home that your home office takes up.

Not all rental cases are as simple as computing the part of your home you use as your office.

For example, if you are living and working in a home with a roommate who also uses your shared rental as their place of primary business, you will need to divide the shared space. Let’s say you are using 100 square feet of the home for your business, your roommate is using another 200 square feet for her own separate business, and you both meet the criteria to deduct rent for your respective businesses.

Aside from the areas you don’t share, you also share 50 square feet in the rental for your qualified businesses. You and your roommate can each claim 25 square feet, or divide the space in an agreed-upon reasonable manner.

If you run an in-home daycare in your rental, the rules differ. You may be able to claim a deduction for the part being used, even if you use the same space for personal purposes. For example, your dining area is used for the daycare during the day and as your family’s dining room at night.

To qualify for this deduction, you must meet the following requirements:

  • Provide daycare for children, people 65 years old and above, or persons who are unable to care for themselves, physically or mentally.
  • You also must have been granted a certification, registration, license or approval as a daycare center or as a family / group daycare home under state law (or be exempt from this requirement).Your application should not have been rejected or revoked.

If you use a part of your rented home for the daycare, you must compute and determine the percentage of time the area is used for the daycare business. Doing this can be challenging, so we recommend you work with a firm like Emerald Expectations to ensure your deductions are correct.

Remember, any reduction in tax for a small business is significant, especially for start-ups trying to keep down their operation costs. That is why it’s important to learn about these rules and determine whether you can treat your rent as a business expense.

Deducting commercial rent – office space, retail locations, warehouses:

On the other hand, if you rent an office space for your business, can you write off your rent as a business expense? The answer is yes.

Rent paid for a commercial space is typically fully-deductible as a business expense. This includes office space, retail locations, storage spaces, and warehouses. For a retail business, renting a storefront is a vital part of running their business. Office space is also required when a business is growing and needs space for more employees. Storage space used for products and stocks is also necessary for running a business. In order to operate, you need these spaces.

However, there are some exceptions to this rule. Rent-to-own agreements cannot be deducted, as some people or businesses pretend to rent to be able to deduct the expense, but they are actually purchasing the property. The rent must also be deemed “reasonable,” which loosely translates to market price to avoid people exaggerating or inflating their rent expense.

Whether you rent office space, retail locations, or warehouses for your business, keeping track of rent expenses to ensure you file them correctly when tax season rolls around is essential.

There are also some cases where the answer to the question of writing off rent is not as clear.

For example, you might wonder if you can still deduct rent if you work in a co-working space. This means you do not use the space exclusively for your business, and other people also work there. The answer is still yes; renting a co-working space is a fully-deductible business expense.

Also, if you have a partnership or multi-member LLC, the rules also differ. Only the portion of the rental expense an individual is responsible for may be deducted. Each member can deduct 25% of their office rental expense if you have a four-member LLC.

Generally, the IRS considers rent a business expense, and most businesses or companies can write it off as a deductible expense. Again, there are some exceptions to the rule, and businesses must meet specific criteria to be able to deduct their rent as a business expense. The rules may also differ depending on what type of business entity you have, whether it is a sole proprietorship or an LLC.

Knowing when and what to deduct is part of tax planning and is crucial for any small business. Here’s an example to further illustrate how much you or your business can save if you write off your rent. If you use the simplified method for your home office, you can deduct $5 per square foot up to a total of 300 square feet. Just with this example, you can already declare $1,500 rent as a business expense.

We understand that there are many rules and regulations regarding tax deductions, business use, and tax write-offs. However, with a little studying and practice, you can figure out what to do and which strategies works for you and your business. Don’t forget to carefully keep track of all your business expenses, including rent, to ensure you are ready when you need to file your taxes.

The best thing to do is to work with a tax professional to ensure you are filing correctly and not committing potentially costly mistakes. It’s better to spend on a service that can help you save money versus trying to recover from tax-related mistakes.

We at Emerald Expectations are experts at what we do. Whether you have tax issues or accounting concerns, we can help. Call us today and see how you can also write off rent as a business expense.

Hi, I’m Kimberly.

Thanks for stopping by. At Emerald Expectations, we love making a big impact on small businesses like yours by educating, growing profits, increasing cash flow, and reducing your tax liability.

If you’re always worrying that something important is falling through the cracks or you feel like your current tax or financial strategy is lacking, we can help you offload that stress so you can feel at peace knowing everything is being taken care of.

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