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Are My Small Business Rent Payments Tax Deductible?
If you own a small business, you know that tax time can be a confusing and stressful season, and one that comes with its fair share of questions. One of the most confusing parts of the process for many is determining exactly what can be counted as a tax deduction. After all, no one wants to feel like they might be leaving much-needed money on the table when they file their taxes. One of the most common questions many small business owners find themselves asking is: Is rent tax deductible?
What is a Tax Deduction?
First, let's break down what a tax deduction is. Also known as a write-off, a tax deduction is any expense that can be subtracted from your total taxable income to lower the amount you owe.
For instance, if your total self-employment income is $60,000 for one year, you will have to pay the 15.3% self employment tax, as well as the income tax based on your tax rate. When you add the SE tax for $60,000—$8,478—and the income tax—$4,865 for a single taxpayer— the total tax you owe will be $13,343.
If, however, you were able to find a few expenses that were vital to conducting your business, such as $3,000 in business travel expenses, you could subtract that amount from your total income. This would lower your taxable income to $57,000.
For those who own a small business, knowing exactly what counts as a business expense can quickly become a gray area. In general, though, any expense that is directly related to conducting your business may be able to be claimed.
Is Rent Tax Deductible for My Small Business?
One of the biggest expenses for small business owners is rent. The good news is rent can be deducted as a business expense, as long as it is for property that you are using for the business.
Working From Home
Freelancers, rejoice! Yes, you can claim a portion of your residential rate as a deduction if you use that space to conduct your business. Keep in mind, however, that in these cases only the portion of your space that you use for work can be counted.
For instance, if you have a 2,200 square foot home, and do the majority of your work in your 130-square-foot home office, you will only be able to claim your office space. To figure out exactly what portion of your home rent you can claim, use the following formula:
([Square footage of your workspace] divided by [square footage of your entire home]) multiplied by (your total monthly rent) equals (the amount you can write off each month).
To find your annual rent write off, multiply your monthly write off by the number of months you worked from home.
Renting an Office
If you are self-employed and rent an office space from which you conduct your business, your rent for that office can usually also be deducted.
The good news in this case is that you can deduct 100% of your office rent on your annual taxes, as you are using 100% of the space for your business. However, you cannot count both your home office and your external office rent on your taxes for the same period of time.
If you rent a space for your business, such as a storefront, you can also deduct this rent from your annual taxable income. Again, this is because this space is a necessary part of owning and operating your business.
Things to Keep in Mind
When determining what rent payments can count as write-offs, there are a few things you might want to keep in mind:
- Only businesses who rent their space, not own, are eligible for this particular deduction. Payments made as part of a conditional sales contract do not count as a deductible rent expense.
- If your rent is deemed “unreasonable”, you cannot take rental deduction for it. “Unreasonable” rent is any that is higher than the market value or the value estimated by a professional appraisal.
- You may be able to deduct the costs incurred by canceling a lease from your taxable income.
- If you pay your rent in advance, you can only deduct the amount that applies to the use of the property during the tax year for which you are filing. The rest can be deducted in the next tax year.
Final Word: Is Rent Tax Deductible?
Whether it's rent payments or charity donations, the world of small business tax deductions can be hard to navigate without professional advice.
We help small businesses with their monthly accounting services and tax preparation in the Raleigh area. Call us today at 919-420-0092 or fill out the form below.
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