What type of expense is rent payment?
A rent payment is an example of an operating expense. It represents the regular cost a business pays to occupy office, retail, or production space. Rent is part of the company’s day-to-day operating costs and appears on the income statement as an ongoing expense necessary to keep the business running.
What is a rent expense?
Rent expense refers to the periodic payment a business makes to use property or space for operations. This can include offices, warehouses, retail storefronts, or production facilities. Because rent is a recurring cost tied to normal operations, it’s considered an operating expense rather than a capital expense.
How to categorize rent expenses
- Record as Operating Expenses in your income statement.
- Use a “Rent Expense” or “Occupancy Expense” account in your chart of accounts.
- If part of the space is used for production, allocate that portion to Cost of Goods Sold (COGS).
- For prepaid rent, record it as an asset and expense it over the rental period.
- Include related costs like parking or common area maintenance (CAM) if they’re part of the lease agreement.
Examples of rent expenses
- Office rent for administrative or corporate space.
- Warehouse or factory rent for inventory or production.
- Retail or storefront rent for sales operations.
- Equipment or machinery rental for business use.
- Co-working or shared workspace fees.
Tax implications for rent expenses
- Rent payments for business property are 100% tax-deductible as ordinary business expenses.
- Home-based businesses can deduct the portion of rent that corresponds to business use (typically by square footage).
- Rent paid for personal use is not deductible.
- If leasing from a related party, ensure rent is set at fair market value to avoid IRS scrutiny.
- Keep copies of lease agreements and payment records for accurate reporting and audit protection.
