How Much of Rent Can You Write Off?
Navigate the rules for deducting business rent expenses to reduce your taxable income. Get clear insights on qualifying and calculating your write-offs.
“Writing off rent” means reducing your taxable income by deducting rent payments as a legitimate business expense. This practice allows eligible individuals and businesses to lower their overall tax burden. It applies to costs associated with a business’s operational space, whether a portion of a home or a dedicated commercial property.
Eligibility for Rent Deductions
Deducting rent expenses requires meeting specific conditions. For individuals operating a business from home, the Internal Revenue Service (IRS) imposes strict criteria for the home office deduction. The space must be used “exclusively and regularly” for business purposes. It must also be the taxpayer’s principal place of business, a place where they meet clients or customers, or a separate structure used exclusively and regularly for the business. This deduction is available to self-employed individuals, independent contractors, and small business owners. Employees are not eligible to claim the home office deduction for tax years 2018 through 2025.
In contrast, businesses renting a separate commercial office, retail space, or warehouse face simpler rules. Rent paid for such a dedicated business location is 100% deductible, provided the expense is “ordinary and necessary” for the trade or business. An ordinary expense is common and accepted in the industry, while a necessary expense is appropriate for the business operation.
Calculating Home Office Deductions
The home office deduction can be calculated using one of two primary methods: the actual expense method or the simplified option. The actual expense method allows taxpayers to deduct a percentage of their actual home expenses, determined by the portion of the home used for business. This is often calculated by dividing the business area’s square footage by the home’s total square footage.
Under the actual expense method, deductible expenses include a proportionate share of rent, utilities, homeowner’s insurance, real estate taxes, and mortgage interest. Direct expenses, such as the cost of painting or carpeting specifically within the home office, are 100% deductible. Depreciation of the business portion of the home can also be included.
The simplified option offers a straightforward alternative. This method allows a fixed deduction of $5 per square foot for business use of the home, up to a maximum of 300 square feet, resulting in a maximum deduction of $1,500 per year. While simpler, this method may result in a smaller deduction if actual expenses for a larger home office exceed the $1,500 cap. A home office deduction cannot be used to create or increase a business loss.
Rent for Business Premises
Rent paid for a dedicated business location outside of the home is a fully deductible ordinary and necessary business expense. This includes rent for a commercial office, retail store, manufacturing facility, or warehouse. The rent must be directly related to business operations and be a reasonable amount.
Unlike the home office deduction, dedicated commercial spaces have no complex “exclusive and regular use” tests or pro-rata calculations. If the rent is for a legitimate business purpose and does not represent an acquisition of equity in the property, it is deductible. Other associated costs like utilities, insurance, or maintenance paid separately for the commercial space may also be deductible.
Record Keeping for Deductions
Maintaining meticulous records is fundamental for substantiating all rent deductions, whether for a home office or a commercial space. These records are essential for demonstrating the legitimacy of your claims in the event of an audit by tax authorities. Your record-keeping system should clearly show your income and expenses.
Essential records to keep include lease agreements, cancelled checks, bank statements, and utility bills. For home office deductions, documentation of square footage measurements and receipts for repairs specific to the office space are also important. Records should be retained for at least three years after filing your tax return.