What Expenses Can Be Deducted as Operating Expenses?

Utilizing the tax deductions for landlords is a key way to save yourself money.

One of the most prevalent tax deductions for landlords is rental property operating expenses.

Operating expenses can come in many shapes and forms. Rather than listing out every single cost that might qualify as an operating expense, the IRS has listed four qualification criteria that an expense must meet.

In this article, we’ll be going over this criteria.

Ordinary and Necessary

The first qualification an operating expense must meet is that it’s ordinary and necessary. In other words, is the expense helpful and appropriate for your business? This doesn’t mean every expense has to be essential to your business operations, however.

Here are some examples of rental expenses that qualify:

• Auto and travel expenses

• Cleaning and maintenance

• Insurance (property and commercial general liability insurance, and a portion of your automotive insurance if you use your car for rental purposes)

• Legal and professional fees

• Management fees (individual resident manager, property management company, or property management software)

• Mortgage interest paid to banks or other financial institutions

• Other interest expenses, such as interest on a credit card used for rental purposes

• Repairs

• Taxes

• Utilities

Bear in mind that these are just examples. There are certainly other qualifying expenses you can incur that aren’t listed here. Unless a purchase is absurd and doesn’t serve a business purpose, it’ll most likely qualify.

Directly Related to Your Rental Activity

Rental operating expenses must serve a business purpose. You can’t deduct an expense used for personal purposes. This means when a purchase is used for both rental business purposes and other purposes, you can only deduct a percentage of the cost that correlates to business usage.

For example, if you pay rent for a small office where you manage your business, you can deduct these rent payments as operating expenses. However, if you only use the office for rental purposes 50% of the time, you can only deduct 50% of the costs.

Reasonable in Amount

The IRS doesn’t specify a dollar amount that is considered unreasonable; it all comes down to the context of the expense. If there are more economical ways to arrive at the same outcome, then the expense will most likely be considered unreasonable, and your claim will get rejected. Furthermore, your deductions cannot exceed more than you spend.

It’s important to note that the IRS pays particularly close attention to travel and meal expenses. To get these expenses deducted, you must follow strict rules that involve thorough documentation. The IRS also pays close attention to outrageous salaries.

Current

Operating expenses must be exhausted or used up in less than a year. If an expense’s contribution can be felt after a year, it doesn’t qualify as an operating expense. Instead, it must be treated as a capital expense or depreciation.

For example, cleaning, maintenance, isolated repairs, and office supplies count as operating expenses because the benefits of these expenses are not long-term. However, larger renovation projects or purchasing equipment like a power washer or lawnmower improve your property for many years and therefore don’t qualify as operating expenses.

What Kinds of Expenses CAN’T Be Deducted as Operating Expenses?

While we’ve covered the four categories a purchase must meet in order to qualify as an operating expense, here are some costs that explicitly don’t qualify for deductions under any circumstances:

• Fines and penalties owed to the government for violating the laws (e.g., parking tickets)

• Political contributions and lobbying expenses

• Entertainment expenses such as skiing outings, sporting events, theater, nights out at nightclubs, or vacation trips

• Illegal bribes, kickbacks, or private parties for government workers

• Real estate examination or licensing fees

• Federal income taxes on your rental income

Conclusion