Now that things have slowed down considerably for contractors, it’s a good time to look into bartering with them to fix up your property. Here are some ideas on how to arrange it so you get the most deductions when they’ll do you the most good.

According to the IRS, repairs don’t materially add to the value of your property or prolong its life. Rather they keep the property in efficient operating condition. And therefore repairs such as these are immediately deductible:

• painting, both interior and exterior walls
• fixing leaks and repairing the damage they caused
• cleaning the exterior of a building, where the work doesn’t prolong the building’s life
• patching a roof
• shoring up a building’s foundation to prevent its collapse
• fixing the deteriorated surface of a sidewalk, driveway or parking lot

Whether you own or rent the building you use for business, you can write off the cost of repairs in the year you make them.

Tax Strategies

Before you decide how to handle repairs and/or improvements, you’ll want to decide how quickly to take deductions for them. Most of the time you’ll want the write-offs as fast as possible.

But if business is slow now, or you’re starting up and have no income, you may want to spread out the deductions to future years when you expect to be in a higher tax bracket. (Deductions would be worth more to you then.)

If you seek quick deductions, you’ll want work on your property to qualify as repairs. This means patching your roof instead of replacing it…painting walls instead of paneling them…and caulking around windows instead of buying new ones.

(But don’t let taxes control your decisions—look at the whole picture. If your roof needs to be replaced, it’s foolish and costly to repair it year after year.)

Try to have repairs done separately from improvements. Do them at different times—ideally, in different years. Another consideration is to get separate bills for different kinds of work. Even better, have different contractors do the work.

Again, don’t let the tax “tail” wag the dog. If it’s cheaper to have one contractor do all the work at one time, you may be better off going that route and foregoing some immediate deductions.

If deductions will be more valuable to you in later years, simply reverse the suggested strategy. By combining repairs and improvements into one rehabilitation plan, you can capitalize the entire cost.

Residential Rental Property

If you also own rental property you should know that the principles explained here apply to these rentals as well. But residential rental property is depreciated over 27.5 years, rather than the 39 years for commercial property.

How To Handle Improvements

Only repairs are immediately deductible. when you have a “plan of rehabilitation,” all the work you have done will be considered capital improvements, not repairs.

Improvements can be written off only through depreciation deductions over the life of the property. For a commercial building, this is now 39 years.

In some cases, you may have no choice in how to fix up your property. But other times you can arrange things to get the most deductions when they’ll do you the most good.

An improvement increases the property’s value, adds to its usefulness, adapts it for a different use, or prolongs its life.

Here are some types of work the IRS usually says are improvements, and thus must be capitalized:

• resurfacing or installing a new roof
• rebuilding a foundation, or shoring it up so it will support a new or remodeled structure
• resurfacing walks, driveways or parking lots
• paneling walls or adding an acoustical ceiling

Whether you’re a landlord or tenant, you must capitalize improvements you make over the building’s depreciable life. Commercial buildings—office buildings, warehouses, stores and factories—are now 39-year property. Thus, a new roof or a building addition or new windows must be depreciated over 39 years, under the straight-line method.

If you improve a building you rent, and you leave the improvements behind when your lease is up, you can write off their remaining (undepreciated) cost in that last year.

Editor’s note: Businesses often incur expenses to satisfy local building codes or environmental laws. Say you need to add sprinklers or fire exits or rewire your building to comply with your city’s fire code. Such expenses usually must be capitalized. Costs of removing asbestos are also considered capital expenditures.

There has never been a better time to work with contractors on a barter basis…
BARTER

This entry was posted on Tuesday, April 8th, 2008 at 1:20 am and is filed under Entrepreneurs & Small Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.