How should I deduct a bathroom and renovations for a home-based salon?

[patmag]

Hi. My spouse runs a beauty salon as a single-member LLC from our home. The salon has a completely separate entrance and doesn't share space with our living area. In 2024 we made some improvements to meet licensing requirements and improve the space for clients, and I'm a bit unsure how to handle them for tax purposes.

We separated an area of our garage and built a bathroom specifically for salon clients. It was required for the business license but also for the clients to have a dedicated bathroom. It’s only used for business. I am a contractor so I built it myself and purchased all the materials which were around $3k.  Do I need to depreciate this as a capital improvement, or is there a way to expense it?

We also renovated the salon area itself, added lighting, put in an accent wall, blinds, and even built some custom furniture. The materials were around $2k Can any of this be expensed, or does it all have to be depreciated?

I assume tools purchased during the renovations are not to be deducted, since I left it for personal use, correct? 

She is running the salon from home temporarily until the business grows enough to rent a space so depreciate over a course of years would not be really beneficial.

Thank you

[ThomasM125]

You can elect to report your improvements as expenses if your gross receipts are less than $10,000,000 and your building has a unadjusted cost basis of less than $1,000,000. If so, you can expense the cost of your improvements up to 2% of the basis of your building or $10,000, whichever is less. You will see the option to take this election when you make an asset entry on the screen that says Let's see if you can claim these improvements as expenses:

You enter the cost of the improvements as miscellaneous expenses. The tools would not be deductible unless they were purchased specifically to make the improvements.

[patmag]

Thank you! I was not aware of this option. This seems to be the way to go. Should I categorize it by materials (plumbing, lumber, decor etc.), or by room (salon, bath), or just add it all up and list it as renovations? 

Edit.

I just noticed the <2% requirement. I bought the house a while ago for $165k so $3k (spent on bathroom) and $2k (spent on salon) is a bit more than the 2% of the original purchase price of the property.