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Clean up taxwise on mold removal

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in Small Business Tax,Small Business Tax Deduction Strategies

We’re often asked about tax consequences surrounding environmental cleanup costs. The answer is usually pretty much the same: Cleanup costs must be capitalized, so there’s no current write-off for the employer.

Strategy: Take a different approach for removing mold from a business building. The IRS differentiated a situation involving mold removal in a private letter ruling in 2006.

The letter ruling is noteworthy because it established a unique rationale for this environmental hazard. (IRS PLR 200607003)

As you’re probably well aware, your business can deduct all the “ordinary and necessary” expenses it incurs and pays during the year. This includes expenses for regular repairs that don’t prolong the property’s useful life or cause it to significantly appreciate in value. (You can’t deduct expenses for permanent improvements.)

Facts of the ruling: One wing of a nursing home became mold-ridden due to excessive moisture. The owner removed the mold by tearing out most of the drywall and fixtures and replacing the moldy drywall with new drywall of similar quality. The owner then painted the drywall and reinstalled the old fixtures.

Based on these facts, the IRS determined that the owner could deduct the mold remediation expenses as ordinary and necessary business expenses. It cited four reasons:

  1. The building use stayed the same.
  2. No structural alterations were made.
  3. The mold problem didn’t appear until after the owner acquired the building.
  4. The work didn’t prolong the building’s useful life or cause it to appreciate in value.

The situation differed from prior rulings involving asbestos remediation. In those rulings, the IRS separated encapsulation expenses from removal costs. It said encapsulation costs can be deducted currently, while removal costs must be capitalized. But encapsulation is not an option for mold; removal is the only solution.

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