Lease Takeover, Termination Fees and Security Deposits: Deducting Studio and Office Lease Costs on Schedule C (2026)

Published: November 4, 2026 · Reading time: 11 min

TL;DR: Monthly rent is the easy part: it goes on Schedule C line 20b in the year you pay it. The expensive surprises are the one-off payments around a lease. A fee to take over a lease or to change one is capitalized and amortized over the lease term. A payment to cancel a business lease is generally deductible as rent. A refundable security deposit is not rent until you lose it. In the example below, a $12,000 takeover fee on a lease with 48 months left produces a $1,000 deduction in 2026 and $3,000 a year after that, while a $9,000 cancellation payment with 36 months left is $9,000 in 2026 if it is a true cancellation, against $750 if it is treated as a cost of getting or changing a lease.

Most rent advice stops at "rent is deductible," which covers the monthly check. But if you have taken over a departing tenant's lease, paid a broker, talked a landlord into letting you out early, or put down two months' deposit, the real money moved around the edges of the lease. Those payments are treated differently from rent, and the difference is measured in years of timing.

This guide walks through each event in a lease's life, shows what the IRS materials say about it, and runs the numbers on a hypothetical example. For the basics of line 20 itself, see our guide to Schedule C line 20, rent or lease. For build-out costs, see leasehold improvements for tenants.

A note on the sources

Much of the clearest IRS wording on this topic is in Publication 535, Business Expenses. The IRS says on its guide page: "We have discontinued Publication 535, Business Expenses; the last revision was for 2022." The 2022 text is still the plainest published statement of these rules, and the Code section and regulation behind it are current, so this post cites all of them. Where a rule is my reading of a source rather than a quote, I say so.

Step one: what did the payment buy?

Pub 535 defines rent in one sentence: "Rent is any amount you pay for the use of property you do not own." Everything else turns on whether a payment fits that sentence. Four questions sort almost every lease-related payment:

1. Did it pay for using the space during a period? That is rent.
2. Did it buy the lease itself from someone else, or a broker's help getting one? That is a cost of getting a lease.
3. Did it change the terms of a lease you already have? That is a modification cost.
4. Did it end the lease? That is a cancellation payment.

The invoice label does not decide the answer. Pub 535 makes the point about modification payments: you "can't deduct the payments as additional rent, even if they are described as rent in the agreement."

Event 1: you take over an existing lease

A common version: a photographer is leaving a studio, you want it, and the lease has four years to run. You pay the departing tenant a fee to assume it, and then you pay the landlord rent as normal.

Pub 535 is direct about the fee: "If you get an existing lease on property or equipment for your business, you must generally amortize any amount you pay to get that lease over the remaining term of the lease." The same section covers brokers and finders: "Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. You must amortize these costs over the term of the lease."

The Form 4562 instructions say the same thing in the language of the form: "If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease." The regulation is older but consistent: 26 CFR 1.162-11(a) allows the purchaser of a leasehold to deduct "an aliquot part" of the sum each year, based on the number of years the lease has to run.

The 75 percent renewal test

There is a catch that matters when a lease has renewal options. Section 178(a) says "the term of the lease shall be treated as including all renewal options (and any other period for which the parties reasonably expect the lease to be renewed) if less than 75 percent of such cost is attributable to the period of the term of the lease remaining on the date of its acquisition."

In plain terms: if at least 75 percent of what you paid is for the years that are left on the current term, you amortize over those years. If less than 75 percent is, you must stretch the amortization across the renewal options too. How you split the price between the current term and the options is a facts and circumstances call, so get it in writing from the seller if you can.

Worked example: Priya takes over a studio

Priya Nair, a hypothetical freelance photographer, uses the cash method and files on a calendar year. On September 1, 2026 she takes over a studio lease with 48 months left and pays the departing tenant a $12,000 assignment fee. Her rent is $1,800 a month.

The fee is $12,000 divided by 48 months, or $250 a month. Prorating by month is a common way to apply the rule, and your preparer may do it differently. The monthly rent is a separate deduction on line 20b: four months of $1,800 is $7,200 in 2026.

Now suppose the fee is split $8,400 for the 48 remaining months and $3,600 for a two-year renewal option. The 75 percent threshold is 75 percent of $12,000, which is $9,000. Because $8,400 is 70 percent of the total and is below $9,000, the term includes the renewal option: 48 plus 24 is 72 months. The fee is then $12,000 divided by 72, about $166.67 a month, or $2,000 a year, and only $666.67 in 2026. The renewal option cost her about $333 of 2026 deduction, and it would stretch the write-off by two years.

Where it goes on the return

The 2025 Schedule C instructions say: "Enter on line 20b amounts paid to rent or lease other property, such as office space in a building." The fee is not that. It is amortization, reported on Form 4562, Part VI, which lists "The cost of acquiring a lease (section 178)" as one of the costs you can amortize. The Form 4562 instructions say to report the total "on the applicable 'Other Deductions' or 'Other Expenses' line of your return." On the 2025 Schedule C, the Part V total goes on lines 48 and 27b. In later years, if nothing else requires Form 4562, the instructions say: "Report the amortization directly on the 'Other Deductions' or 'Other Expenses' line of your return." Form line numbers can change, so check the 2026 version when it is released. Our guides to Schedule C Part V other expenses and other expenses (the page still uses its older line 27a label) cover that part of the form.

Event 2: you pay to change the lease

Maybe you decide you need less space, or you want a shorter term, and the landlord agrees for a fee. Pub 535 treats this as a capital cost: "You must capitalize these payments and amortize them over the remaining period of the lease."

Its example: a 20-year lease with annual rent of $7,000. The tenant asks to give back part of the space, the landlord drops the rent to $6,000 and the tenant agrees to pay an extra $3,000, as 60 monthly installments of $50. The IRS says to capitalize the $3,000 and amortize it over the 20-year term, which is $150 a year. The $600 the tenant actually pays each of the first five years is not deductible as rent.

The lesson for a freelancer is that installment payments called rent are not always rent. If a payment buys a change in the lease rather than use of the space, expect amortization.

Event 3: you pay to get out

This is the most favorable of the lease events, and the language is short. Pub 535: "You can generally deduct as rent an amount you pay to cancel a business lease." It is the mirror of the landlord's rule in Publication 527: "If your tenant pays you to cancel a lease, the amount you receive is rent."

Worked example: Marcus ends a lease early

Marcus Lee, a hypothetical video editor on the cash method, finds a better studio. On October 1, 2026 he pays his landlord $9,000 to end a lease with 36 months remaining, and moves into a better unit the same landlord owns under a new 36-month lease.

Under a true cancellation Marcus deducts the full $9,000 in 2026. If instead the payment is viewed as the price of a changed lease or a new one, the deduction is $9,000 divided by the new lease's 36 months, or $250 a month, and the 3 months of 2026 produce $750. The whole difference is timing. It is still a real $8,250 swing in the 2026 return.

I would not assume the favorable treatment applies automatically. The Pub 535 sentence says "generally," and the facts matter. Marcus signs the new lease with the same landlord in the same conversation, so the question is whether the $9,000 is really a cost of the new deal. A tenant who ended a lease and moved to an unrelated building would have a much stronger case for a true cancellation. That is my reading of how the cancellation and modification rules sit side by side, not a quote, and it is a reason to keep the termination agreement and have your preparer read it.

Event 4: the deposit

A security deposit is the payment that causes the most guesswork, because it feels like rent when you hand it over.

I did not find IRS guidance written for the tenant on deposits, so this section leans on the definition of rent and on the landlord's side of the same transaction. Publication 527 tells the landlord: "Don't include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease." The same passage adds an important exception: "If an amount called a security deposit is to be used as a final payment of rent, it is advance rent."

My reading, as a tenant:

• A deposit you expect back is not an amount paid for use of the property. Do not deduct it when you pay it. Track it as money the landlord owes you.
• A deposit the landlord keeps is generally deducted in the year you lose it, on the line that matches what the money covered. If it covered unpaid rent, it is rent. If it covered damage to the space, it is an ordinary business expense of a different type.
• A deposit that the lease says is applied to the last month's rent is advance rent, and it follows the prepaid rent rules below.

Because the lease language decides which of these you have, read the deposit clause before you decide how to book it. If you sublet part of your space, our subletting guide covers the other side of the deposit.

Event 5: you prepay rent

Landlords sometimes ask for first and last month up front, or give a discount for paying a year ahead. For a cash-method taxpayer, Pub 535 says: "If you are a cash method taxpayer, you may deduct the entire amount of rent you paid in advance in the year of payment if the payment applies to the right to use property that does not extend beyond the earlier of 12 months after the first date you have the right to use the property or the end of the tax year following the year in which you paid the advance rent."

If the payment reaches past that, you "must capitalize the rent payment and deduct it over the period to which it applies." Its example: a three-year lease paid in full during the first year allows $6,000 a year, not $18,000 up front. Accrual-method taxpayers can deduct only the part that applies to the current year. Our guides to the 12-month prepayment rule and to cash versus accrual accounting go deeper.

Event 6: free months and rent steps

Landlords often offer a free month or two to sign, or write in annual increases. For a cash-method sole proprietor with an ordinary small lease, the practical rule is simple: you deduct the rent you actually pay in the year you pay it. A free month is a month with no rent deduction, and I would not smooth it by averaging unless your preparer says the lease requires it.

There is a boundary. Pub 535 says special rules apply where "the lease calls for total payments of more than $250,000" and rents increase, decrease, are deferred or are prepaid. They generally require an accrual method for the rental expense, under section 467. A freelancer's studio lease at $1,800 a month for 60 months comes to $108,000, well below that. A multi-year lease on a large space can cross it.

Event 7: taxes and fees the landlord passes through

Many commercial leases pass the property tax through to the tenant. Pub 535: "If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor." For the cash method: "If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them." Keep the landlord's statement with your rent record.

A quick sort of lease payments

Records to keep

The classification above depends on documents, so collect them when the deal happens, not at tax time:

• The signed lease, plus any assignment, modification, termination or release agreement.
• The settlement or closing statement showing who was paid what.
• A line-item note for any combined payment, such as an assignment fee that also includes furniture you bought.
• The written split between the current term and renewal options, if there is one.
• Proof of payment for every check or transfer to the landlord or prior tenant.
• The deposit receipt, and the landlord's accounting if part of it is kept.
• An amortization schedule showing the start date and the yearly amounts.

If your studio closes down, the lease costs belong in your final-year picture too, and our guide to closing a Schedule C business lists the rest.

How CentSense helps

Lease costs come in odd shapes: a closing statement, a PDF assignment, a check to a prior tenant, a landlord email about a deposit. Start a free CentSense account, scan receipts and settlement statements as they arrive so the amounts and dates are captured with the paper, and log your business miles for the drive between the old studio and the new one. The free tier includes 10 AI receipt scans a month.

Frequently Asked Questions

Can I deduct a fee I paid to take over someone else's studio or office lease?

Not all at once. IRS guidance says a fee paid to get an existing business lease is generally amortized over the remaining term of the lease, and the lease term can include renewal options when less than 75 percent of the cost is attributable to the remaining term. A $12,000 fee on a lease with 48 months left works out to $250 a month, or $1,000 for a September 1 start in 2026. The amortization is reported on Form 4562, Part VI, under section 178, not as ordinary rent. Confirm the allocation between the original term and any renewal options with a tax professional.

Is the money I pay my landlord to cancel a business lease deductible?

Generally yes, as rent, in the year you pay it. Publication 535, whose last revision was for 2022, says you can generally deduct as rent an amount you pay to cancel a business lease. The word generally matters: if the payment is really the price of changing the lease or signing a new one, the capitalization rules for lease costs can apply instead. In a hypothetical example, a $9,000 cancellation payment on October 1, 2026 is a $9,000 deduction that year if it is a true cancellation, but only $750 in 2026 if the payer then signs a new 36-month lease with the same landlord and the payment is treated as a cost of acquiring that lease.

Is a security deposit on my studio or office lease tax deductible?

Generally not while you expect to get it back, because a refundable deposit is not a payment for the use of the property. It becomes a deduction in the year you lose it, for example when the landlord keeps it, and the line depends on what the money covered. A deposit that is really meant to be the final month's rent is treated as advance rent, so it follows the prepaid-rent rules instead. Whether a particular deposit is refundable depends on your lease, so read the clause and confirm with a tax professional.

Can I prepay a year of studio rent and deduct all of it this year?

If you use the cash method, Publication 535 allows the full deduction in the year of payment only when the payment covers the right to use the property for no longer than the earlier of 12 months after the first date you have the right to use it, or the end of the tax year following the year of payment. Rent that reaches beyond that must be capitalized and deducted over the period it covers. Accrual-method taxpayers deduct only the part that applies to the current year.

What if my landlord gives me free months of rent?

On the cash method you deduct the rent you actually pay, so a free month produces no rent deduction for that month, and you do not deduct an imagined average. This is the general approach for a lease with total payments of $250,000 or less. Leases with total payments above $250,000 and changing rents are subject to special rules under section 467, which can require accrual-style treatment. Confirm your own lease with a tax professional if it is large.

Where do these costs go on Schedule C?

Rent for office space or a studio goes on line 20b. Amortization of the cost of acquiring a lease is figured on Form 4562, Part VI, and the total is reported with other expenses (on the 2025 form, the total of Part V flows to line 27b). The 2025 instructions allow amortization that began in an earlier year to be reported directly on the other expenses line when no other reason requires Form 4562. Line numbers can change for 2026 forms, so check the current form.

Do I deduct property taxes my landlord passes through to me?

Generally yes, as additional rent. Publication 535 says that if you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor, and that on the cash method you deduct them only in the year you pay them. Accrual-method taxpayers follow a different timing test. Keep the landlord's pass-through statement with your rent records.

Authoritative References

• IRS: Guide to business expense resources (Publication 535, discontinued; 2022 revision linked there)
• IRS: Publication 535 (2022), Business Expenses, chapter 3, Rent Expense
• IRS: Publication 527, Residential Rental Property
• IRS: Instructions for Form 4562, Depreciation and Amortization
• IRS: Instructions for Schedule C (Form 1040)
• 26 U.S.C. 178, Amortization of cost of acquiring a lease
• 26 CFR 1.162-11, Rentals

Keep the paper with the payment. Start a free CentSense account, scan receipts and settlement statements as you get them, and log business miles for every trip between locations. The free tier includes 10 AI receipt scans a month.

This guide is general education for U.S. self-employed people who file Schedule C on the cash method. It is not personalized tax advice. Priya Nair and Marcus Lee are hypothetical, their amounts are illustrations, and the example covers federal timing of deductions only, not tax savings. Publication 535 was last revised for 2022, form line numbers shown are from 2025 instructions and may change, and how a lease payment is characterized depends on the lease documents. Confirm your own situation with a CPA or EA before you act.