Small Business Taxes & Management

Special Report

Renting for Less


Small Business Taxes & ManagementTM--Copyright 2008, A/N Group, Inc.


Most businesses rent at least some real property. In fact, if you're starting out, one of the best ways to conserve cash is to rent your office, store, warehouse, etc. You avoid the cash outlay required by a downpayment if you purchase the property. You also avoid unanticipated repairs that could prove catastrophic to a business with limited cash reserves. And, while renting is usually more expensive, that's not always the case. Even if renting is more expensive than owning, the difference is often relatively small. Moreover, you can deduct the full amount of the rent. If you own the property you can deduct the out-of-pocket expenses, interest, and depreciation. Nonresidential property is depreciated over 39 years and you get no depreciation on the purchase price allocated to the land. The big disadvantage is you're not building equity. But that may be a small price for the flexibility and cash flow savings.

Startups you always think twice about buying. There's a much higher probability the business will change in some significant way, necessitating a change in location. While it may still be expensive, getting out of a lease is usually a lot cheaper and easier than selling a building.

Buying a property also means you'll usually be adding substantial debt to your balance sheet. That might make it more difficult to finance receivables, inventory, equipment, etc.

Note. The same argument generally doesn't apply to personal property such as equipment, computers, etc. The implied interest rate on leasing or renting personal property is usually much higher.

Renting office or retail space can easily be a substantial part of your monthly expenses. There are several ways to keep the costs to a minimum. Keep in mind that some may have significant disadvantages depending on your business. Here are some tips:

You may be able to come up with additional ideas. But don't neglect other factors. For example, locating operations in more than one building will be detrimental if you can't control the employees. And don't go for cheap space if it's not appropriate to the business. If you need high visibility or convenient location to draw customers, forget that out-of-the-way location. And don't even think about that converted tannery if you've got high profile customers coming to visit the office.

Another point. Make sure you have a professional well versed in real estate. Specifically, you want an attorney who knows real estate law and, if at all possible, one who understands the local market.


Copyright 2008 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 08/28/08