When you hear the term office expenses, what image comes to mind? Paper, ink cartridges, calculators, photocopier, post-it notes, desk, chair, computer, a bulletin board filled with thumbtacks and notices? Most of us envision such items when we think of an office and consider the cost of this office-stuff to be office expenses. A logical assumption? Yes. A correct conclusion? No, at least not according to the IRS.

Office Expense, Line 18 on Schedule C, is another return line whose function does not match the conventional interpretation of its title. Clarifying what is and is not deductible on Line 18 of Schedule C is the topic of this article.

Items NOT Deducted on Line 18, Office Expense: Like Professional Fees reported on line 17 of Schedule C, the simplest way to define costs reported as office expenses is: Office-related outlays NOT more appropriately deducted elsewhere. The best way to determine what costs get deducted on Line 18 is to eliminate office-related costs reported in other places.

• Home Office Expenses: Real Estate Agents who have a qualified home office (which is very important to maximizing your auto expense) will have very few (if any) line 18 office costs. Home office expenses get reported on Form 8829, Business Use of Your Home. We have a complete series of articles discussing The Home Office Deduction as it applies to Real Estate Agents. The first of the series discusses Home Office Deduction Requirements. The home office deduction is also covered extensively in our Real Estate Agent Tax Cut Library.
• Office Consumables: Items that are used up in office operations such as paper, pens, toner, staples, highlighters, and post-it notes (to name a few) are not office expenses. They are supplies deducted on Line 22 of Schedule C.
• Leased Items: The cost of leased office equipment, such as a copier, is a rent expense reported on Line 20a.
• Telephone: Telephone and cellular service are reported as an Other Expense on Line 27a, not as an Office Expense. Note: A land-line to your home is only deductible if it is a second line. The first line is not deductible.
• Utilities: If you have a separate office (not a home office), utility services get deducted on Line 25 of Schedule C. Otherwise, deduct them on Form 8829, Business Use of Your Home.
• Furniture and Fixtures: Office furniture and fixtures that cost over a certain threshold ($500 or $2,500 depending on business policy) must be depreciated, not deducted as office expenses. For more information, please see our article Real Estate Agents, Depreciation Expense. Also note: Furniture and fixtures used in a non-qualified home office are not deductible or depreciable.

Office Expenses Deducted on Line 18: Perhaps the best way to describe Office Expenses is: Costs related to keeping the office running and visiting customers happy, not supplies purchased for it. Unfortunately, however, this description is not entirely correct since some of the costs deducted as office expenses are strikingly similar to the non-office outlays listed above. So, what are we to do? We’re going to Illustrate IRS tax-form ambiguity by sharing costs defined as Office Expenses reported on Line 18:

• Cleaning service for the office
• Coffee and water services for the office (for employees and customers)
• Plants and care for office plants
• Inexpensive decorative items for the office
• An outside agency that provides an answering service (not voicemail)
• Off-the-shelf software for general office use (such as Microsoft Office)
• General business applications for iPad and cell phones
• Online Fax Services
• Storage & Filing Boxes
• Inexpensive Office Furniture and Fixtures
• Newspaper and magazine subscriptions for lobby or waiting room
• Antivirus Software Renewals
• Office Cleaning Supplies
• Eating utensils for employee use (such as paper plates, cups, plastic knives, and forks)

Do some of these items resemble supplies or repair and maintenance expenses? Yes, they do – but to report them as such would be incorrect. They are office expenses reported on Line 18.

Remember: If you have a qualified home office, many of these expenses get deducted as direct or indirect home office costs on Form 8829. If you have a home office that does not qualify for a home office deduction, many of these costs are still deductible, except those benefiting the office-area itself (such as plants and cleaning).

Why Proper Reporting Matters: All this hair-splitting over where items get deducted on a tax return may seem like overkill, but it’s necessary to avoid IRS scrutiny. The IRS uses algorithms to compare amounts reported on various lines of your tax return to the amount they expect to find for real estate agents who are sole proprietors. If expenses vary significantly from the amounts anticipated, IRS computers might flag the return for further inquiry or even an audit.

Take Away: Office Expenses, Line 18 of Schedule C, exemplifies the challenge real estate agents face when attempting to prepare (or understand) their tax return. Many costs commonly considered office expenses are NOT Office Expenses, according to the IRS. To direct an office-seeming outlay to its proper deduction-home, consider the nature of the purchase. If the purchase was for office-related consumables such as paper, it’s a supply. If it keeps the lights on, it’s probably a utility reported on Line 25. If its nature does not point to another location, it may be a genuine IRS-defines office expense!

Summary and Invite: We hope this article clarified items deducted as office expenses on Schedule C. If you’d like to learn more about cutting your highest cost: TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.