What Are Facility Expenses for a Business?

Facility expenses represent the costs a business incurs to operate and maintain its physical locations. These expenditures are a component of a company’s operating costs, reflecting the price of having a brick-and-mortar presence. Understanding the nature of these expenses is important for properly accounting for them and ensuring compliance with tax regulations. These are not optional costs but are intrinsically linked to the day-to-day functions of the business.

Common Types of Facility Expenses

A primary facility expense is the cost of occupying the space, which takes the form of monthly rent or mortgage payments. A business must also pay for the utilities that make the space functional, including electricity, natural gas, water, sewer services, and waste disposal. Internet and phone services are also considered a utility and a facility expense.

Another category of facility costs relates to the upkeep and security of the property. This includes routine janitorial services, regular maintenance for systems like heating, ventilation, and air conditioning (HVAC), and expenses for repairs. Property insurance is an expense, as are property taxes levied by local governments on owned real estate, and security services through monitoring systems or on-site personnel.

Tax Treatment of Operating Facility Costs

The Internal Revenue Service (IRS) allows businesses to deduct expenses that are considered both “ordinary and necessary.” Facility costs that are recurring and maintain the business’s operational capacity meet this standard. Expenses such as monthly utility payments, rent, property insurance premiums, and minor repairs are fully deductible in the tax year they are paid as operating expenses.

For an expense to be deductible, the “ordinary” criterion means the expense is common in that particular trade or industry, while the “necessary” criterion means it is helpful and appropriate for the business. Businesses must maintain clear records, such as receipts and invoices, to substantiate these deductions in the event of an IRS audit, as this documentation provides proof of the expense.

Accounting for Capital Improvements and Depreciation

Not all spending on a facility can be immediately deducted. A distinction exists between a repair and a capital improvement. A repair, such as fixing a leaky faucet, maintains the property’s existing condition and is expensed in the current year. A capital improvement enhances the property’s value, extends its useful life, or adapts it for a new use, such as replacing an entire roof or renovating a building.

A cost for a capital improvement cannot be fully deducted in the year of the expenditure. Instead, the cost must be capitalized, meaning it is recorded as an asset on the company’s balance sheet. This asset is then expensed over its useful life through depreciation, an accounting method that allocates the cost of a tangible asset over its expected period of use.

For tax purposes, the IRS prescribes specific depreciation schedules using the Modified Accelerated Cost Recovery System (MACRS). Under MACRS, nonresidential real property is depreciated over 39 years using the straight-line method. For example, a $390,000 roof replacement would be depreciated at $10,000 per year for 39 years, though shorter recovery periods may apply to other improvements.

Special Considerations for Leased Properties

Businesses that lease their facilities encounter unique types of facility-related costs, particularly leasehold improvements and common area maintenance (CAM) charges. Leasehold improvements are modifications or enhancements made by a tenant to a rented space, such as installing specialized lighting or building interior walls. Even though the tenant does not own the building, these improvements are considered assets of the tenant’s business.

The costs of leasehold improvements are capitalized and depreciated by the tenant. While the general depreciation period for a nonresidential building structure is 39 years, many interior improvements may be classified as Qualified Improvement Property (QIP). QIP has a much shorter 15-year recovery period and is also eligible for bonus depreciation. For 2025, the bonus depreciation allowance is 40%, and it is scheduled to decrease to 20% in 2026.

Many commercial leases also include provisions for CAM charges. These are fees paid by tenants to the landlord to cover the costs of maintaining shared spaces such as lobbies, parking lots, and restrooms. From the tenant’s perspective, CAM charges are treated as additional rent and are fully deductible as an ordinary and necessary operating expense in the year they are incurred.