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Q: My wife and I just purchased a 100-year-old Victorian house where we plan to start a day spa and hair salon. Since we bought the home specifically to market and brand our business, can we deduct the closing and moving costs as business expenses? Can we deduct exterior maintenance and improvements as business expenses?
-J.B., Nazareth, Penn.
A: Whether property is used as a personal residence or a place of business, the closing costs associated with its purchase are usually required to be "capitalized." In the case of business property, this means that they will be depreciated over time for tax purposes. The period of time that applies to nonresidential property is 39 years, and for residential property the time period is 27.5 years, according to Laura M. Zaplishny, a CPA and senior tax manager at Rothstein Kass Certified Public Accountants in Roseland, N.J.
"Costs incurred for improvements to the property that are of a permanent nature (such as installing new roofing) would be treated in the same manner," Zaplishny says. Your property taxes, depending upon certain circumstances, may also have to be capitalized under IRS code section 263A, she adds. Once your business begins operations, your property taxes and maintenance costs will be fully deductible as business expenses.
Assuming your business has not yet opened, any exterior property maintenance that you're doing now—things that wouldn't be considered permanent improvements— would be capitalized as "startup" expenditures. The same goes for moving expenses that you've incurred in moving business assets, such as equipment or furniture, that would normally be tax-deductible, according to Zaplishny.
Startup expenditures up to $5,000 can currently be expensed for tax purposes. Startup expenditures in excess of $5,000 may be expensed ratably over a period of 15 years (180 months), though there are some limitations after the total costs exceed $50,000. In order to choose this tax treatment, you'll need to attach a statement to this effect to your business or personal tax return in the year your business opens, she says.
When you purchase new equipment after the business starts, any shipping or installation expenses associated with it will be capitalized as part of the cost of the equipment and depreciated over a specific period of time depending on what kind of equipment it is.
As you can see, just in this one area, the tax rules are confusing and difficult at best. You'll also need to address the tax implications involved with your personal moving expenses and with having a business located in your home, Zaplishny says.
This is why anyone starting a business needs to have a relationship with a CPA who is knowledgeable about small-business issues, and particularly tax rules. Get some referrals for local accountants from other entrepreneurs and meet with a few before you hire one. You'll want to look for a good rapport with someone you can trust and work with closely, because you'll be relying on this person to help you make crucial financial decisions for some time. Taking these questions—and others that are sure to arise—to a pro will help ensure that your salon is well equipped for the future.
Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues
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