Rules on Deducting Rent…Do You Know Them?

Rent expense seems like a pretty straightforward topic, but there are a few points that need to be made to ensure you aren’t breaking any rules.  Let’s look at a few salon owners and their “rental” situations.

Kate is a typical salon owner and she rents a space in a local strip mall to run her business.  She will not receive any equity in the property and she has only paid for the 12 months in the current year.  The rent that she pays to the landlord, will be deductible on her taxes as a business expense.

Felisha also owns a salon and she rents her location from her brother that owns the property.  In addition to her regular monthly rent payments, she has agreed to give her brother a “higher than normal” percentage of her gross sales.  She knows her brother needs the money and she thinks that she can write it off as a business expense.  The only portion of the rent that will be deductible is the amount that Felisha would pay to another landlord that she is not related to.  Unreasonable rent, especially to a family member, is not allowed.  If her brother charged her approximately the same as other landlords, then she can deduct the full amount.

Jonathon has had an exceptionally good year and his revenue is above average.  He is reviewing his financial statements in December and is looking for ways to reduce his tax liability.  He has enough money set aside that he could pay the next 6 months rent.  He could go ahead and pay the rent in advance, but it will do him no good on his taxes for the current year.  Jonathon will only be allowed to deduct the portion of the rent that applies to his tax year.

Kendra has been offered to join another salon owner as a partner, but her current lease does not expire for another 3 months.  She doesn’t want to wait to move forward on this new venture, but she is concerned about how to handle the cancellation fee that she will pay.  Kendra can deduct the cancellation fee as an expense when the cancellation is executed, ending the lease term.  This is an allowable deduction when used in a trade or business.

These four salon owners are all paying rent, but they have encountered much different circumstances in the operation of their businesses.  These different situations result in the different ways that rent payments can be handled.  If you have a question about rent payments, please contact us at or 407-988-5647.

Categories: Tax Information

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