Tax Breaks for Paying Rent
If you rent your home, no personal tax deductions are available for your monthly rent payments. However, if you rent office, warehouse or retail space for a business, the rent is fully deductible on your business tax return. In addition, working from home can provide you with a tax break for a portion of your rent if you are eligible for the home office deduction.
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Self-Employed Home Office Deduction
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You are eligible for the home office deduction if you operate a business out of your home and use an area exclusively and regularly for business purposes. If you use a spare bedroom as an office, you cannot also use it to accommodate overnight guests, regardless of how infrequent. Compute the percentage of the square footage of your home devoted to your office. Multiply this by your housing expenses, which always include your rent, to arrive at your home office deduction, which you report on Schedule C.
Employee Home Office
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As an employee who works at home, you are also eligible to claim a home office deduction, which you calculate in the same way self-employed taxpayers do. You must work at home for the convenience of your employer, and not your own. If your employer pays for your home office, you cannot claim the deduction. Employees report the deduction as a miscellaneous expense on Schedule A.
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Renting for Business
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When you rent property and use it exclusively for business purposes, you can deduct 100 percent of your rent payments. Also deductible are the expenses that relate to the rental, such as utility charges, insurance premiums and the cost of making repairs to the property.
Reporting Business Rent
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You report your rent payments on the appropriate tax form for your business structure. For example, sole proprietors report rent expenses on Schedule C, whereas corporations report it on Form 1120. The IRS requires that your rent be reasonable for its size and location. This becomes more significant when you rent from a relative. In this case, the IRS may scrutinize the expense more closely to insure that your rent doesn’t include any nondeductible expenses when the amount exceeds the fair rental value.
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