The Business Property Tax Deduction Depends on the Property
The business property tax deduction or list of deductions depends on more than just the property. Whether it is owned or leased makes a difference, how it is used in the business, whether it is shared with non-business use, and other conditions influence deductibility. For an overview, this article will look at three situations and the differences in the property tax deduction items on a business tax return.
The business property is leased exclusively for business use:
The lease of a business location is quite common, but businesses also lease equipment and vehicles for exclusive business use. The key word is “exclusive,” meaning only for business purposes.
- Leased real estate – the simplest form of a building or space lease is for the business tenant to pay a lease fee with the owner taking care of maintenance and other facility related expenses. There is also what is called a triple net lease. In this lease the tenant pays all the costs to maintain the space or structure. Either way, the property tax deduction is normally the actual costs incurred by the tenant.
- Leased equipment – if the business leases production equipment or other specialty equipment such as forklifts, the amounts paid in the lease are tax deductible if the equipment is used exclusively in the business. Any expenses related to the upkeep and repair of the leased equipment are also property tax deduction line items.
- Leased vehiclesi – when a business leases a vehicle for exclusive business use, the payments made on the lease are deductible. You can also deduct your other costs in one of two methods:
- Actual Cost Method – you keep a record of all your actual costs that include fuel, repairs, registration fees, tolls, and maintenance.
- Mileage Method – many business owners find this more convenient, as you just keep a record of your business vehicle miles driven and that the IRS standard deduction, $0.56 per mile.
Any overview like this cannot take every little detail in the pages of IRS rules into account, so work with a tax professional or CPA to get it done right and avoid problems that cost money.
The business property is purchased exclusively for business use:
Instead of leasing, you buy property for exclusive use in the business for this discussion.
- Purchased real estate – should you buy a structure for your business, maybe a retail sales location, a warehouse, or a workshop exclusively for business use, you have some valuable property tax deduction items available to you.
- You have different ways in which you can depreciate the property, taking an annual deduction based on the depreciation method.
- All maintenance, repair, and other normal expenses. Renovations would normally require depreciation instead of a full cost deduction the year of the expense.
- Property taxes, permits, and other expenses required to have the structure used for business.
- Purchased equipment – Equipment used in the business, including items like forklifts, expensive office equipment, and production equipment may require depreciation, or the cost could be deductible in the year of purchase through Section 179. Section 179ii of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. You can also take property deduction items that include:
- Repairs and maintenance of the equipment.
- Modification costs.
- Fuel costs of operation.
- Purchased vehicles – Certain vehicles based on IRS rules can qualify for the Section 179 full cost first year write-off. Others must be depreciated. As discussed above, the other costs of operation can be written off using the Actual or Mileage method.
The property is used partially for business and partially for personal use:
- Home Office/Business – If you use a portion of your home exclusively for business, you can deduct expenses for that percentage of the total home square footage used for business. Get the details here.
- Personal Vehicle Business Use – Using the Actual or Mileage method as explained above can be used for deductions. In the case of shared personal use, the percentage of business mileage would be used for the actual expense method. For the mileage method, a record is kept of actual miles driven for business. Learn more here.
As with everything IRS related, a property tax deduction discussion is best conducted with your tax professional or CPA to get it right.