Polish off tax deductions for mold removal

Readers often ask us about the tax consequences of paying environmental cleanup costs for their businesses. Although there are some variations, the answer is usually pretty much the same: Cleanup costs generally must be capitalized, which means that there’s no current write-off.

Strategy: Claim a current deduction for the cost of removing mold from a business building. The IRS differentiated a situation involving mold removal in a private letter ruling back 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.

HR Forms D

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.

Tip: This ruling doesn’t apply to your personal residence.