You should have a nice office — for many reasons. It can impact employee performance, contribute to customer or client satisfaction, and affect your profitability and ultimate business success. Setting up and maintaining your physical layout entails one-time and ongoing costs.
Office Expense Deductions
The tax rules on how to write-off office expense deductions can be confusing. Here is what you need to know.
Rent or Mortgage
Depending on whether you own or lease your office space, you can deduct your rent or mortgage interest costs.
If you operate from home, these costs are part of a home office deduction. What you write off depends on whether you figure your home office deduction using actual costs or rely on an IRS simplified method.
Office Furniture and Equipment
A desk, a file cabinet, a printer, etc. These and other items likely are used in your office.
The tax law gives you a number of options for deducting your costs:
· Section 179 first-year expensing: For 2019, there is an overall dollar limit on the cost of property you elect to expense the cost upfront: $1,020,000.
· Bonus depreciation: For 2019, this is 100% of your cost in the first year.
· Regular depreciation: If you do not elect the Section 179 deduction and forego bonus depreciation, you can use regular depreciation to deduct the cost of furniture and equipment over a set period.
· De minimis safe harbor. If you do not capitalize your costs (i.e., you do not add the items to your balance sheet), you can deduct up to $2,500 per item or invoice as non-incidental materials and supplies (explained later) in the year of purchase.
Paper and pens, cleaning supplies, and other small items can be deducted in full. This is premised on the notion that you only buy what you think you will use up within a year or so. In tax parlance, these items are incidental materials and supplies (you do not keep a physical inventory of them or a record of when they are used) and are fully deductible when you purchase them.
Some items you keep on hand in your office may be viewed as non-incidental material and supplies (items for which you keep an inventory or record of consumption). These include, for example, printer toners. The cost of these items is deducted in the year they are first used or consumed in your business. They can also be deducted up front using the de minimis safe harbor discussed earlier.
If you subscribe to periodicals for your waiting room, you can deduct the cost. However, if the subscription is for more than one year (e.g., a three-year subscription) and you prepay the entire amount, you will need to prorate the cost.
Maintenance and Repairs
If your office requires some maintenance or repairs, the cost is fully deductible. For example, you have a fish tank and pay for regular maintenance. The cost of this ongoing service is deductible.
If you need a new coat of paint that the landlord will not pay for, the cost is deductible. But if you make permanent improvements, you may not be able to fully deduct them in the year you pay for them.
Electricity, Internet access, and perhaps cable TV for your waiting room? All of these monthly costs are deductible. If you have a home office, see the rules referenced earlier in connection with rent and mortgage.
The cost of insurance for property damage to and liability coverage for incidents in your office (typically combined in a business owner’s policy, or BOP for a small business) is fully deductible.
If you decorate your office, you probably will be able to deduct the costs. For example, if you buy posters to brighten up your walls, the cost is deductible (see the rules for office furniture and equipment).
But if you buy works of art, you can’t write-off the cost. The reason: they do not have a limited life, so the IRS bars a deduction.
This list of deductible office-related costs is not exclusive. As long as the cost for your office item is an ordinary and necessary business expense, likely it will be deductible.
Find more in IRS Publication 535.