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Clean up on generous business deductions for mold removal

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in Small Business Tax,Small Business Tax Deduction Strategies

The IRS has addressed the tax consequences of environmental cleanup costs in several rulings. Although the details differ, the basic thrust is the same: Cleanup costs generally must be capitalized, which means your business earns no current tax benefit for the expenses.

Inside advice: You can, however, write off the cost of removing mold as a current business expense. That’s because a new IRS private letter ruling establishes a slightly different rationale for this environmental hazard. (IRS LR 200607003)

As you know, your business can deduct ordinary and necessary expenses. That includes expenses for regular repairs that don’t prolong the property’s life or cause it to significantly appreciate in value. (You can’t deduct expenses for permanent improvements.)

The IRS case: 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, then replaced the moldy drywall with new drywall of similar quality. The owner then painted the drywall and reinstalled the old fixtures.

Based on those facts, the IRS determined that the owner could deduct the mold-remediation expenses as ordinary and necessary business expenses. The IRS cited four reasons: the building use stayed the same, no structural alterations were made, the mold problem didn’t appear until after the owner bought the building and the work didn’t cause the building to appreciate in value or prolong its life.

This situation differs from prior rulings involving asbestos remediation. In those rulings, the IRS separated encapsulation expenses from removal costs. Encapsulation costs may 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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