When you sign an office lease, only the rent is a monthly expense. The security deposit is money you expect to get back, so it's an asset. Buildout you pay for is usually an asset too. Free rent months and landlord allowances are worth sending to your CPA before you record anything.
What you pay at signing
In a made-up example, you sign a lease at $3,000 a month with a $6,000 security deposit. At signing you pay $9,000. Only $3,000 of that is rent expense. The $6,000 deposit goes on your Balance Sheet as an asset, because the landlord holds it and should return it when you leave, minus any damage.
If the deposit gets recorded as an expense, your profit looks $6,000 worse that month and the money disappears from your records. Years later, nobody remembers it's owed back to you.
Buildout
Walls, plumbing, cabinets, lighting and wiring you pay for in the space are often called leasehold improvements. They usually go on the Balance Sheet as an asset and get spread over time, often over the shorter of their useful life and the lease term. How that works on your tax return is your CPA's call. This post explains depreciation.
Keep every buildout invoice together. Contractors, permits and design fees all belong in the buildout total.
Landlord allowances and free rent
Many leases include a tenant improvement allowance, where the landlord pays part of the buildout, or a few months of free or reduced rent. Both change how the lease should be recorded, and both can have tax effects. Send the lease to your CPA before your bookkeeper records the first payment.
Read the money terms before you sign
The lease decides more than rent. I'd look for:
- Yearly rent increases and when they start.
- Shared costs like taxes, insurance and maintenance, sometimes called NNN or CAM charges.
- Who pays for repairs to heating, cooling and plumbing.
- Required insurance amounts.
- What happens to the deposit and the buildout when you leave.
Legal terms are for your attorney. The money terms are worth running through your cash runway first. Start with your runway.
What I'd do this week
- Send your bookkeeper a copy of the lease.
- Confirm the security deposit is on the Balance Sheet as an asset, not an expense.
- Gather every buildout invoice in one folder.
- Put rent increase dates and the lease end date on your calendar.
Common questions
Do shared building costs count as rent?
They're usually recorded with occupancy costs, often in their own account next to rent. That makes year-end reconciliations from the landlord easier to check.
Does my lease need to go on the Balance Sheet?
Some accounting standards put leases on the Balance Sheet. Many small cash-basis practices don't apply them. Ask your CPA what your books and return need.
What if the landlord keeps part of the deposit?
The part they keep becomes an expense when you move out, recorded as repairs or a loss. Send your bookkeeper the landlord's statement.
Want your lease recorded right from day one?
We reconcile every account every month and send your P&L and Balance Sheet by the 15th, so decisions like this start from real numbers. If that's what you need, apply to work with us.