The most dreadful time of year for many business owners (and accountants) is fast approaching: tax season. As the April 18th deadline looms, you most likely are calculating how much you made–and what expenses can be written off as a tax deduction. You might be asking yourself, “Is a business renovation a tax deduction?” In short, it is. Here’s everything you need to know about writing off your commercial construction expenses on your taxes from the point of view of a contractor.
Note: we are not accountants and cannot provide official tax advice. We highly recommend talking to your accountant or another qualified tax professional before making decisions regarding your taxes.
Commercial construction and your taxes
Most commercial construction projects are tax deductions. The IRS counts any repairs to a business space or the construction of a new place of business as expenses which can be written off on your taxes. There are, of course, some exceptions to this rule, as there is with almost any tax regulation.
Usually, new commercial construction is fully tax-deductible. Renovations are where it gets tricky. The IRS defines repairs and renovations as two different things. A repair is a project which brings a building back up to working condition but doesn’t improve the space. So repairing rain damage after a big thunderstorm would be tax deductible–and 100% of the expense could be written off.
Most renovations, however, fall into what the IRS calls a capital improvement. A capital improvement is any addition or renovation to a space which raises its value. It is often at a significant cost and extends the life of a building. For example, if you redo your clothing store so it fits better with current trends, that would be considered a capital improvement as it adds value to the space.
Is a business renovation a tax deduction?
When a renovation is considered a capital improvement (and most are), you can count is as a tax deduction but not the full amount and not all at once. The IRS defines a capital improvement as something which extends the “useful life” of a space. Since improvements and many renovations allow the space to be used for longer, they fall into this category. You can deduct the cost of these improvements, but you can’t deduct the value of the improvements made.
Using a set depreciation schedule, improvements and renovations are depreciated before they can be deducted. You also can’t deduct the total expenses all at once. Smaller portions are deducted each year. For example, if you spend $10,000 on a renovation project and are on a ten year depreciation cycle, you would divide 10,000 by 10 (for the ten years). Thus, you could deduct $1,000 a year for the next ten years from your taxable income.
Business renovations and Virginia taxes
In the state of Virginia, most businesses have to pay taxes on their property. There are exceptions to this rule, such as churches and specific nonprofits, which are laid out in Virginia tax law. There can be a partial exception from paying property tax on structures 20 years of age or older when improvements are made during a fiscal year.
Whether a building qualifies for partial exemption or not depends on the judgment of the county, city, or town. To see if you qualify for a partial exemption on property tax, it’s best to consult with an accountant who is familiar with Virginia and local tax laws. Working with a local contractor can sometimes make this easier too. If you’re in the Virginia Beach, Chesapeake, or Hampton Roads area, for example, consider working with an accountant and contractor from the same area.
Carlton Building Services in Hampton Roads Virginia
Carlton Building Services specializes in repairs, maintenance, renovations, remodelings and build-outs for a variety of clients in Hampton Roads, Virginia Beach, and Chesapeake areas. We have years of experience handling projects in the retail, office, and healthcare space and would love to work with you on your next project!
To learn more about our services, check out past project highlights or contact Carlton Building Services to see how we can help with your next project.
