If you are considering making improvements to your business property, you are probably aware that most of the renovation, restoration, or reconstruction costs will be tax deductible to some extent, which can save you some money come tax day. But did you also know that, depending upon the type of rehabilitation you are planning, you may be able to save a great deal more than expected by taking advantage of the rehabilitation tax credit?
While a tax deduction is certainly one way to save money, a tax credit allows you to save even more of your rehabilitation costs. Here is the official Internal Revenue Service statement regarding the rehabilitation tax credit:
The rehabilitation credit applies to costs you incur for rehabilitation and reconstruction of certain buildings. Rehabilitation includes renovation, restoration, and reconstruction. It does not include enlargement or new construction.
Generally, the percentage of costs you can take as a credit is:
- 10% for buildings placed in service before 1936
- 20% for certified historic structures
As with most things associated with the IRS, there are strict guidelines that must be followed in order to be eligible for the tax credit. To make sure you are following the letter of the law, your costs must be qualified. Qualified rehabilitation expenses include costs associated with:
- Exterior and interior work
- Additional costs and fees, such as engineering fees, architectural fees, site survey fees, legal expenses, development fees, and other construction-related costs
Be advised: The IRS has declared that the following types of expenses are not eligible for the tax credit:
- Acquisitions. If you are planning on purchasing the building next door to add space to your existing business, be aware that the cost is not eligible for the rehabilitation tax credit. (However, you should consult with a tax professional about when, where, and how to get the most tax advantage for that transaction.)
- Furnishings. Before you go out and spend a small fortune on new chairs and desks, keep in mind that furniture does not qualify for the tax credit. But you will receive the normal tax deduction for such purchases.
- Parking lots, sidewalks, and landscaping. These kinds of things are not eligible for the tax credit, just the normal tax deduction.
- Additions. New additions to your existing property are also not eligible for the tax credit.
In addition to the federal tax credit program, you may be eligible to receive an additional credit on your state tax return. Many states have passed legislation offering their own incentives and tax credits for rehabilitation projects. To see if your state has a similar program, consult with a local tax expert or visit the official Web site of the state where you will be making the renovations.