Small business rent expenses may be tax deductible

2022, Tax Tips

IRS Tax Tip 2022-37, March 9, 2022

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.

Here are some things small business owners should keep in mind when it comes to 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 PDF 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.

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 PDF, 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: