Tax Benefits of Leasing Commercial Property in Massachusetts

As the deadline for filing your 2024 taxes just came and went, now is the perfect time to discuss and reevaluate important decisions that will impact you next tax season. A major talking point is whether you should be leasing or buying commercial property for your business. While owning real estate may offer long-term advantages, leasing can provide immediate and significant tax benefits—especially in a state like Massachusetts with its own set of tax rules and economic dynamics.

If you’re still weighing your options, CCA is here to help you break down the key tax benefits of leasing over buying a commercial property in Massachusetts:

1. Full Deductibility of Lease Payments

One of the biggest perks of leasing is that lease payments are fully deductible as a business expense on your federal and Massachusetts state taxes. This means you can write off 100% of your lease costs against your taxable income—offering more predictable and immediate tax savings year to year.

Example:
If your business pays $100,000 per year in lease payments, that entire amount can typically be deducted—reducing your taxable income significantly.

2. Avoiding Depreciation Schedules

Buying commercial property requires spreading out the tax deduction over time through depreciation—usually 39 years for non-residential real estate. Leasing sidesteps this. Instead of waiting decades to recover the property’s value through small annual deductions, lessees can deduct the full lease amount annually.

This not only simplifies your accounting but can also improve your cash flow and profitability in the short term.

3. Reduced Upfront Capital Requirements

Buying requires a large down payment, often 20% to 30% of the property’s value—not to mention closing costs, legal fees, and property taxes. These capital outlays do not provide immediate tax benefits and tie up cash that could otherwise be invested back into your business.

Leasing, on the other hand, allows you to preserve working capital. Any upfront costs (like security deposits or first month’s rent) are usually much lower and in many cases partially deductible.

4. Massachusetts-Specific Incentives and Considerations

Massachusetts offers additional tax advantages to lessees, especially in urban enterprise zones or when leasing in newly developed areas. While property taxes are levied on owners, tenants in lease agreements typically avoid direct liability for property taxes, unless explicitly passed through in the lease.

Moreover, Massachusetts doesn’t tax leasehold improvements if they’re made by the landlord. If the improvements are made by the tenant, these may qualify for depreciation—but you avoid the complexity entirely if the landlord handles them.

5. Sales and Use Tax Savings on Fixtures and Equipment

Massachusetts imposes a sales/use tax on equipment and fixtures, but lease agreements sometimes bundle these into the lease, especially in “turnkey” office setups. If structured properly, you might avoid paying upfront use tax, as the cost is distributed over the lease term.

This can mean smoother budgeting and a friendlier tax treatment for high-tech or manufacturing businesses that rely heavily on specialized installations.

6. Flexibility to Adapt with Minimal Tax Impact

The ability to scale up or down is crucial in today’s business climate. Exiting or renegotiating a lease typically has fewer tax and financial implications than selling a property—especially if real estate values drop. Leasing provides a tax-efficient way to stay agile.

Overall

While purchasing commercial real estate can offer appreciation, equity, and long-term stability, leasing provides significant tax advantages—particularly in Massachusetts where property taxes, capital requirements, and depreciation rules can make ownership less appealing in the short term.

Before making your decision, consult with CCA– we can offer guidance and refer you to a tax advisor or CPA familiar with Massachusetts regulations for your specific needs. Leasing might not just save you cash—it might also save you a bundle in taxes. Let’s talk.