What are the tax benefits of building a new structure that is shared by two new businesses?

by Judith Herron, CPA | Dec 12, 2018

I am planning on starting two new businesses for 2019: a travel agency and a dog kennel. I am considering building a pole barn on our property to house both businesses. What are the tax benefits of building a new structure that is shared by two new businesses?

There can be a benefit to owning the building that houses your business from a tax perspective, but it is limited. Assuming your business is going to be the occupant of the building, there is no big tax win in building vs. buying the building. Once the businesses occupy the building, they pay rent to the landlord. Typically, this is another legal entity; in your case, you would still be the owner of the separate legal entity. You do have to charge your business market rent. Here is where you may get a break. It is important to work on the specifics with a CPA, but it is possible the character of income flowing to you from rent would result in a lower tax bill than if you got the income directly as profit from your businesses.    

Under the tax laws prior to the Tax Cut and Jobs Act, there were some accelerated deductions available for leasehold improvements. These were not allowed for related parties, which would be the case in your scenario. Now, the accelerated deductions for these improvements are not allowed. So, at this point, you are not disadvantaged from a tax perspective by owning the building.  

You may want to consider that the really compelling reason to own your office space is having a landlord who is responsive to the needs of your business.

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Answered by: Judith Herron, CPA, is with Markovitz Dugan & Associates in Pittsburgh, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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