Heidi Haugen on wed 23 feb 00
1999 is the first year that I will be filling out a schedule c for my
pottery business and I have a question for any tax gurus or people who
have had the same question.
We rent our home and finished an existing garage for my studio. I know
that when you own a structure and improve or build it from scratch you
have to depreciate the value over 30 or so years. I need to know if we
can deduct the entire cost since it is considered permanent improvement
on a rented studio. We insulated, wired, rocked, taped and installed
baseboard and wood heat entirely at our own cost. The entire time I
kept saying-oh we can deduct it all but now I'm unsure if that is true.
help?
Thanks in advance,
Heidi Haugen
Chris Campbell on thu 24 feb 00
Heidi -
According to my tax person this is an answer for your specific situation as a
renter who has made major renovations that have not been re-imbursed by your
land lord. They can be properly classified as "Lease Hold Improvements" since
you permanently improved the location and added heating.
Since these improvements are expected to last more than one year, your
business can depreciate the amount over the period of your lease. An
aggressive stance would be to take them all at once. It depends on whether
you want to come to the attention of the IRS by doing it aggressively.
Had your landlord re-imbursed you, he could take the deduction.
Hope this helps. Chris - in Carolina
Olivia T Cavy on fri 25 feb 00
Heidi,
Actually the situation for lessees and lessors has been the same for
several years, and it's not the answer you wanted to hear.
First, you have to distinguish between expendable repairs and
improvements that MUST be capitalized. But let's first assume that you
have determined that you have a capital improvement.
Then (this is the part you won't like) the cost of improvements made by a
lessee/renter to a building or to the grounds are depreciated the same as
if you owned the improvement. So you will be depreciating any capitalized
building improvements over 39 years, on a straight line basis, starting
with the month the asset was placed in service. If you terminate the
lease and leave the asset behind, you can then have an capitalized asset
with a loss upon termination. (I know there's a lot of jargon here, but
it's basically saying that even when you lease, you are creating an asset
that must be capitalized and depreciated.)
BUT (big "but") you need to first decide IF you have a capital asset or
whether you have made a repair. Repairs are expensed (written off) in the
year they are made. Many businesses have a formal capitalization policy
whereby there is a certain dollar threshold before an otherwise capital
asset is capitalized. Often this depends on the size of the business, but
often an amount like $500 is chosen. This means that unless I spend more
than $500, I'm going to expense it. Even if I buy a piece of equipment
for $475, I'll expense it. However if that equipment costs $525, it will
need to be capitalized (which does NOT preclude a code section 179
one-year write off).
So, what is a repair and what is a capital expense? In general capital
expenses include those for buildings, improvements or betterments of a
long-term nature and machinery. Expenses to keep property in ordinary
good working order, keep it operating efficiently, and do not add to its
value or appreciably lengthen its useful life are repairs. According to
the IRS it's simple- they want you to capitalize everything. However most
businesses want to expense everything to get the immediate deduction.
Beyond that, it's a judgment call.
As always, the value of your own time in your own proprietorship is not
counted in income taxes.
This is the quick answer. You should consult your own tax advisor for the
specifics in your situation. Sometimes there is case law that gives a
definitive answer. More often there isn't, and the decision is based on
experience.
Hope this helps.
Bonnie
Bonnie Hellman, CPA in PA & CO
On Wed, 23 Feb 2000 12:38:14 EST Heidi Haugen
writes:
> ----------------------------Original
> message----------------------------
> 1999 is the first year that I will be filling out a schedule c for
> my
> pottery business and I have a question for any tax gurus or people
> who
> have had the same question.
>
> We rent our home and finished an existing garage for my studio. I
> know
> that when you own a structure and improve or build it from scratch
> you
> have to depreciate the value over 30 or so years. I need to know if
> we
> can deduct the entire cost since it is considered permanent
> improvement
> on a rented studio. We insulated, wired, rocked, taped and
> installed
> baseboard and wood heat entirely at our own cost. The entire time I
> kept saying-oh we can deduct it all but now I'm unsure if that is
> true.
> help?
>
> Thanks in advance,
> Heidi Haugen
Bonnie D. Hellman, Pittsburgh, PA
PA work email: oliviatcavy@juno.com (NO attachments please to this
address)
PA home email: mou10man@sgi.net (that's the number 10 in the middle of
the letters)
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