4 Qualifications of Operating Expenses

Knowing what expenses you can deduct as a landlord and how to deduct them can save you and your business a lot of money.

One of a landlord’s most common types of deductions is rental property operating expenses. You can think of operating expenses as the ongoing, everyday expenses landlords have.

Operating expenses can be deducted in the year in which they were incurred. This means you can take your total taxable income and subtract these expenses in a single year, just like you would with a depreciable asset.

But what exactly counts as an operating expense? In this article, we’ll cover the four qualifications that an expense must meet to be considered an operating expense and deducted.

  1. Ordinary and Necessary

The first trait that an expense must meet to be considered an operating expense is that it be ordinary and necessary. This doesn’t mean that an expense must be essential to your business. It just means that an expense must be helpful to your business activity.

Listed below are some of the most common rental operating expenses for landlords according to the IRS Schedule E:

  • Cleaning and maintenance
  • Repairs
  • Auto and travel
  • Utilities
  • Management fees (for software or a hired person/company)
  • Advertising your listings
  • Insurance (including property and commercial general liability)
  • Legal and professional fees
  • Commissions you pay to rental brokers
  • Mortgage interest paid to banks or other financial institutions
  • Other interest payments expenses (such as interest on a credit card you use for rental-related purchases)
  • Taxes

Note that this is a guide, not an exhaustive list. Most expenses that help your business and aren’t outrageous will likely qualify.

  1. Directly Related to Your Business

You can’t purchase something for personal use and deduct it as an operating expense. Every expense must be directly tied to your business activity.

For example, suppose you use a vehicle to drive to and from your rental properties, your primary place of business, and locations to meet tenants, vendors, accountants, etc. In that case, you can deduct the transportation and car expenses incurred for these purposes. However, if you only use your car 25 percent of the time for business purposes, you can only deduct that percentage of your expenses of that vehicle as an operating expense.

You can’t deduct your own time and labor from your taxes, even if it’s spent on business activity. For example, if you spend time making repairs, landscaping, and repainting a property, you can’t deduct that from your taxes. You can, however, deduct any materials you use.

  1. Current

Operating expenses must be used up or made obsolete within one year. Maintenance and cleaning fees are examples of current operating expenses because their effects don’t last more than a year. Isolated repairs also qualify as current expenses that can be deducted in a year, but larger renovation projects, such as buying an entirely new roof, would have to be depreciated over multiple years.

Similarly, supplies such as paint and paper can be deducted as operating expenses. On the other hand, equipment such as power washers and leaf blowers that you use for your properties are considered capital expenses because they’re items made to last several years.

  1. Reasonable in Amount

The IRS doesn’t have an official limit on how much you can deduct as an operating expense. However, if your amount is unreasonable, your claim will be rejected. This means that your deductions can’t exceed what you actually spend. You also can’t deduct a large expense if there are more economical ways to achieve the same results.

There are certain limits the IRS puts on operating expenses:

  • Travel expenses – restrictions are based on how far the trip is and how much time was spent on business while gone
  • Business meals – typically 50% deductible, but 100% deductible from restaurants from 2021 to 2022
  • The home office deduction – restricted to the profit from your business
  • Business gifts – limited to $25 per individual each year

Conclusion

In order to be able to deduct them correctly, you must first know what is included in operating expenses for rental property.

Now that you know the four qualifications of an operating expense according to the IRS — ordinary and necessary, directly related to your business activity, current, and reasonable in amount — you have the knowledge you need to make the most out of your deductibles this tax season.

4 Qualifications of Operating Expensesultima modifica: 2023-01-09T13:02:57+01:00da henrymalan0077

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