Can I shield monies I won in a legal mediation settlement by investing them back into my business? I am a self-employed sole proprietor, and the investment would be a home in which I build my new studio.
First, the question needs to be expanded as to the quality, structure, and amount of the settlement. Is it taxable? How are professional fees accounted for? Are the professional fees deductible? When was it paid?
Second, if the funds are used to acquire or build an office, then a capital asset has been created that should be subject to depreciation. Since it is a building, then the appropriate life should be utilized for depreciation purposes. The life can be substantially accelerated (shortened) if a cost segregation study is preformed and the various structural components can be broken out.
I suggest that you reach out to a qualified CPA who can review all of the above items and develop an appropriate plan of action.
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Answered by: Nicholas J. Crocetti, CPA, is director of tax advisory solutions with CBIZ MHM LLC in Plymouth Meeting, Pa.