How do I deduct my new shop

Discussion in 'Business Operations' started by carlriv, Jan 17, 2002.

  1. carlriv

    carlriv LawnSite Member
    from Mass
    Posts: 99

    I posted this at plowsite but did not get very many responses. Hopefully someone here could help me on this one. I will be meeting with my accountant and would like to discuss this with more insight than I currently have.

    My question is for those who have experience with owning the property you work from. I bought a house with a large garage out back and I have been talking to my CPA reguarding how to approach the deduction. He suggests that I simply take the sq ft home office type deduction for the space. I have several problems with that (not that I am a CPA)

    1. I think the garage is worth more that that.
    2. If I were to rent a shop it would cost $1,000 and up
    3. When the tax man comes I still pay S/E tax on that money

    I am under the impression that rental income is not subject to S/E tax being that it is "unearned income". If that is true I feel that I would be much better off structuring this so the business rents the space from me personally therefore the business would take the deduction of the rent paid to me (no S/E tax) I would get the $$$ to go towards the mortgage and all will be happy. Even our uncle. I think...

    I guess the main question is ... Does anyone do this, what type of business structure (proprietorship, partnership, LLC, S corp, or Corp) do you have and how does it work.

    Thank you for your input on this matter, and hopefully if you read this long post you have some useful input.

  2. bruces

    bruces LawnSite Senior Member
    Posts: 648

    If you are a sole proprietorship or llc, you really can't have the business "rent" the shop from you since you and the business are one entity. If you take dedutions related to the shop (garage), it will reduce your self employment income and thus your self employment tax because of those deductions.

    There are limitations on deductions that you can take if you are renting property to a corporation you own. You might not be able to personally take some deductions related to the property if you are renting to a corporation you own.

    Also, if you allocate a portion of the cost of the property (I assume this is all part of your personal residence) then that becomes business property for that portion. If you take depreciation deductions, then later sell the property at a gain, you would be treated as having two sales, one a sale of your personal residence (generally non taxable) and the second a sale of business property (taxable).

    Theoretically, the business portion of the home must be used exclusively for business purposes. Different rules may apply to storage areas.

    Also, if possible and it is significant, it would be easier if you had separate utilities to the garage so that you had the real cost for the shop.

    One more issue, if you take the square footage approach, you are probably over valuing the garage. Assuming the finished area of the house is a lot more valuable than the detached garage building, if you apportion cost on a square footage basis, you are high on the garage.

    Sound confusing, it is, talk to your CPA and try to work out the simplest scenario that gives you some tax breaks.
  3. lbmd1

    lbmd1 LawnSite Senior Member
    Posts: 462

    You might want to ask your cpa if you can lease the garage back to your business. We are an S corp and our cpa mentioned that we do just that with our garage. He takes care of all the behind the scenes stuff, so I'm not sure how to do it personally.

  4. HBFOXJr

    HBFOXJr LawnSite Bronze Member
    Posts: 1,712

    I built one 20 yrs ago. As a sole prop. we depreciate the building and you could do that with your garage separate from home office unless your office is in the building.

    If your depreciate it you'll be subject to capital gains tax when you sell for bigger dollars than the depreciated value at some point down the road.
  5. carlriv

    carlriv LawnSite Member
    from Mass
    Posts: 99

    I will mention the S corp to my cpa. I do understand depreciation and recapturing the depretiation on the business portion upon sale, and have no problem with that. I am under the impression that at this point if we were to discontinue business at that location for a period of 2 years then we would not have to recapture, however that is a long way out and will cross that bridge when we get there.

    There must be more people that are in this same situation. It seems to me that if you can only take a sq ft deduction you are almost loosing out on some deduction.

    Maybe it is time to talk to a new CPA for new ideas. I really like the one I am using, but I may be his only contractor client.
  6. SCL

    SCL LawnSite Senior Member
    Posts: 543

    I have 3 outbuildings plus my home at my residence. My accountant deducts all three on a depreciation type of basis I believe. Gonna see him next week so I'll try to get more info.
  7. carlriv

    carlriv LawnSite Member
    from Mass
    Posts: 99

    Any other ideas?

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