How to Make the Most of Land Improvements
By Tom Copeland. Published with permission.
What do the following items have in common: outdoor fence, patio, driveway, sidewalk/walkway, underground sprinkler system, cement slab, sewer line, septic tank, underground swimming pool, and a well?
They are all considered land improvements that you can deduct as a business expense.
A land improvement is something that is attached to your land, costs more than $100, increases the value of the land and has a separate useful life apart from the land.
You must depreciate land improvements over 15 years. If you use the item 100% for your business you can depreciate 100% of the cost. If it's used for both business and personal purposes, multiply the cost by your Time-Space Percentage before depreciating. If your actual business use percent is much greater than your Time-Space Percentage, you can use the actual business use percent before depreciating it. See my article on how to calculate an actual business use percent.
If you install a land improvement in 2012 and purchased the item new, you can use the 50% bonus depreciation rule that allows you to claim expenses faster than using the regular 15 year rule.
Let's say you had a new patio installed in June 2012 for $2,000. Your Time-Space Percentage is 40%. Here's how you would claim this expense on your tax return:
$2,000 x 40% = $800
Using the 50% bonus rule you get to deduct 50% of the $800 in 2012 = $400
You must depreciate the remaining amount ($400) over 15 years: $400 x 5% (1st year using the declining balance method) = $20
Total amount claimed in 2012: $420
So, save the receipts for all expenses associated with land improvements (contractor fees, supplies, tools, sales tax, delivery costs, etc.).
Note: if you bought patio furniture that you used in your business, this is personal property that can be depreciated over 7 years and is also eligble for the 50% bonus rule.
Note on Landscaping
Landscaping (trees, shrubbery, sod, plantings, grading and landscaping fees) is not considered a land improvement. If you spend less than $100 on these items, deduct the business portion in one year. If you spend more than $100 and they are put immediately adjacent to your home, depreciate them over 39 years. If they are installed away from your home you cannot deduct them.
Image credit: dreamstime.com
For further information about how to depreciate land improvements, see my Family Child Care Tax Workbook and Organizer.