Lease Expenses vs. Capital Expenditures: What Can You Deduct This 2025 Tax Season?

2025 Tax season is here, and for commercial real estate professionals, understanding what’s deductible can make a real difference to the bottom line. One of the biggest areas of confusion? The difference between lease expenses and capital expenditures—and how each impacts your tax filings.

Lease Expenses: What Can You Deduct?

Lease expenses are operating costs—recurring payments necessary to maintain and operate leased spaces. These are typically tax-deductible in the year they are incurred.

Common Deductible Lease Expenses

• Rent payments – Standard lease payments made to a landlord
• Property taxes – If passed through by the lease
• Common Area Maintenance (CAM) fees – Janitorial services, landscaping, security
• Utilities – Water, electricity, internet, and essential services
• Repairs and maintenance – Routine fixes such as HVAC servicing, plumbing repairs

Key takeaway: Lease expenses are considered ordinary business costs and are typically deductible right away in the year they are incurred.

Capital Expenditures: What’s Not Immediately Deductible?

Capital expenditures (CapEx) refer to investments in property or improvements that enhance the value or extend the useful life of an asset. These expenses cannot be deducted all at once. Instead, they must be capitalized and depreciated over multiple years, according to IRS guidelines.

What Qualifies as CapEx?

• Leasehold improvements – Renovations such as new flooring, lighting systems, or customized office build-outs
• Structural upgrades – Reinforcing foundations, installing a new roof, or replacing outdated electrical and plumbing systems
• Significant equipment purchases – HVAC systems, elevators, or fire suppression systems
• Building expansions or additions – Constructing additional office space, conference rooms, or extended warehouse areas

Depreciation Rules for CapEx

Instead of deducting capitalized costs immediately, businesses must depreciate them over time based on IRS guidelines. Here’s a general breakdown: - Leasehold improvements – Typically depreciated over 15 years (or the remaining lease term, whichever is shorter)
- Building systems and structural upgrades – Often depreciated over 39 years for commercial real estate
- Equipment purchases – Depreciation schedules vary, but most assets fall under 5 to 7 years

In some cases, businesses can accelerate depreciation through bonus depreciation or Section 179 deductions, allowing certain capital expenses to be deducted more quickly instead of spreading them out over years.

What Does NOT Count as CapEx?

Not all property-related expenses qualify as capital expenditures. Some costs remain deductible as operating expenses because they do not significantly improve the asset’s long-term value.

Examples of Non-CapEx Expenses

• Routine maintenance and repairs – Replacing a few broken tiles, repainting walls, or fixing a leaky faucet
• Short-term leasehold costs – Temporary partitions or signage that does not increase property value
• Supplies and consumables – Light bulbs, cleaning products, or minor office equipment replacements
• Tenant-specific alterations – Cosmetic changes made for a particular tenant that do not enhance the overall property value

If an expense restores an asset to its original state rather than improving it beyond its original condition, it is typically classified as a repair and can be deducted immediately.

The Safe Harbor Rule: A Tax Break for Smaller Expenses

The IRS Safe Harbor Rule allows businesses to expense certain improvements upfront instead of capitalizing them. If a single unit of property (like a repair or minor upgrade) costs $2,500 or less per invoice or item, it may be deducted immediately rather than depreciated over time.

Pro tip: If your lease includes improvement allowances, check whether the costs qualify for Safe Harbor treatment—this can mean a big difference in tax savings.

Why It Matters for Lease Accounting

Understanding lease expenses vs. CapEx isn’t just about tax deductions—it also affects ASC 842 lease accounting compliance. Certain expenses may need to be classified separately on financial statements, impacting how your business reports operating costs.

With Spacebase, you can track lease-related expenses, separate operational costs from CapEx, and generate reports that keep your financials audit-ready.

Final Thoughts: Maximize Your Deductions

Properly categorizing lease-related expenses can lead to significant tax savings. Here’s what to do next:

• Review lease agreements to clarify expense obligations
• Identify deductible lease expenses vs. capitalized improvements
• Work with your tax advisor to optimize deductions and Safe Harbor rules
• Use lease management software like Spacebase to keep expenses organized year-round

Tax season is complicated, but your lease expenses don’t have to be. Need a better way to track them? Talk to us today.

Brooke Colglazier

Marketing Manager