Is Office Space Rent Tax Deductible?
The short answer is yes, as long as the office was regularly and exclusively used for work purposes, you can deduct it as a business expense. Whether you rent commercial office space, work from home or a co-working space, rent is likely to be one of the biggest tax deductions you can take as a solopreneur or small business owner in the Boston area.
Deducting Commercial Office Rent
If you rent commercial office space, claiming your rent as a business expense on your taxes is fairly straightforward. It doesn’t matter if you have employees working in the office or you work alone. To calculate the deduction, simply multiply your monthly rent payment by the number of months you occupied the office in the given tax year. For example, if you are an interior designer paying $1200 per month for a furnished executive suite in our office park outside Boston MA, and you occupied the space for 12 months in 2021, you could deduct $14,400 for your rent on line 20b of Schedule C.
However, if you rent commercial office space to work on personal projects unrelated to your business, such as to study for a degree or manage your investments, the rent is not tax deductible because it does not meet the IRS guidelines for business rent expense.
It’s also worth noting that if you own the office building where your office is located, you cannot deduct rent. In this case, you should be depreciating the building and recording any rent payments you receive from tenants as income.
Deducting Co-Working Space Rent
For those self-employed business owners and entrepreneurs who opt for co-working space, rent can also be fully deducted as a business expense. Similar to the example above for commercial office space, the deduction is calculated by adding up the rent paid for co-working space over the course of the year and entering it on line 20b of Schedule C.
If you rent co-working space for only a percentage of the time – for instance, to conduct weekly client meetings – but work from home the majority of the time, you may be able to deduct both your co-working space expenses and a portion of your home costs, provided your workspace meets the IRS home office requirements (PDF).
Taking the Home Office Tax Deduction
Self-employed freelancers and business owners who use part of their home for business may be eligible for the home office tax deduction, regardless of whether you rent or own your home. In order to qualify, the IRS requires that the home office is (1) used regularly and exclusively for conducting business, and (2) the principal place of business.
The standard method for claiming your home office expense requires some calculation and allocation requirements that are a bit more complex than claiming rent for a commercial office or co-working space. You first must determine the square footage of your workspace, whether this is a whole room, or just a corner of your kitchen or bedroom. Then, you divide the square footage of your entire home by the square footage of your workspace to calculate the percentage of your home used for business.
For example, if your home office is 100 square feet and your home is 1500 square feet, your home office is 15% of your entire home. The final step is to apply this percentage to your monthly rent (and any other expenses you want to claim, such as utilities). Assuming your rent is $1500 per month, your home office tax deduction would be $225 per month, or $2700 for the year.
The IRS began offering a simplified option for home office tax deductions in 2013. This method may not yield as high of a deduction, but it eliminates the need for detailed record-keeping and calculations across all of your expenses. Using the simplified method, self-employed business owners working from a home office can deduct a set amount for every square foot of dedicated home workspace. For 2021, the rate is $5 per square foot with a maximum of 300 square feet.
Other Money-Saving Tips for Small Business
Claiming office space rent on your taxes is likely one of the biggest deductions you’ll be able to take as a solopreneur or small business owner, but there are many other ways to save money when you are self-employed.