You may have started your business almost on a lark. Maybe you found that you were really good at making duck decoys, or found something online you could buy for a cheap price, modify, and resell online at a great markup. Perhaps you set up shop in your basement, set up a website, and got to work.
But then something happened. Your business really takes off, and you have to expand your operation. Unfortunately, your inventory starts to grow to the point that the duck decoys begin to take over the rest of your house. It’s when your spouse begins to complain about all the duck decor in your bedroom that you realize it’s time to expand your operations.
So you go out to find some place to work out of. Then it hits you, why not rent an apartment and work out of there? It may work, but there are some things you need to keep in mind.
Zoning
The first is zoning. Some cities and towns are very strict about where businesses can be located, even if it is a small home-based operation. Be sure to check with your town’s regulations to see if you can run a business out of the apartment that you rent.
“Regular Place of Business”
Next, the big question is whether you use the apartment regularly and exclusively for business. This means that you only use the apartment to store inventory, or as a place to conduct business, whether it is to put together your products, perform services, or have meetings with your clients. If you use the apartment for something other than a business purpose, you cannot take a deduction for what you paid for the apartment.
The next thing you need to consider is if this is your regular place of business. Is this apartment where you are meeting regularly with clients and conducting other business? If so, you can deduct its costs.
Deducting Costs of Apartment Rent
So what costs are deductible? The big mistake that people make is assuming that this apartment you rent falls under the rules of the home office expense deduction. Unless you make the apartment your home, this is not the case. This would fall under the same rules as would an office building, so you could deduct things such as:
- The rent you pay on the apartment, which would be included in line 20b of your schedule C.
- The utilities you pay to provide electricity, water, and heat and air conditioning to the apartment, which would be included on line 25 of the schedule C.
The rules on what you can deduct for an office can be confusing. If you do run across something that you don’t understand, check with a good accountant who can walk you through all your options. It is better to understand all your options rather than making a rash decision about how to handle something and pay the steep price later. If you have a particular question, leave it in the comments, and I will get you an answer. If you don’t want to leave a comment, shoot me an email at chrispedencpa@yahoo.com.
This article was originally published by Outright.com
Author: Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at chrispedencpa@yahoo.com, or check out his blog at www.theaccountingscribe.com. In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.
IRS Highlights Credits and Deductions for Small Businesses
Businesses Should Review Depreciation Deductions Rules
Immigration Regulations Loom as a Major Challenge for Small Businesses in 2019