Deductions for shed conversion to business office

[Eileen19]

We purchased a shed to convert into a business office. We are a Handyman Company that services outpatient clinics for s regional hospital. 
1. what part of the shed and remodel costs are deductible?

2. We live across the border in another state and on work days will spend the night at the office. Does this cancel it out as a place of business? 

[Mike9241]

you need to speak to a tax pro. if your home state has an income tax you would likely be subject to its tax laws. having an "office/shed" in another state could subject the business to income taxes in that other state. 

[Opus 17]

1. In general, capital costs for remodeling your office are treated as assets/improvements and are depreciated over time.  Different types of improvements have different recovery periods.

https://www.irs.gov/pub/irs-pdf/p946.pdf

2. Depending on other factors, having your home in one state and your workplace in another state may subject you to a form of double taxation.  If the two states have a reciprocal tax agreement, it may be simpler.  But this is a situation where you need a professional to advise you before you get started.

Specifically regarding the overnight stay, since the shed/office will be your "main place of business", your travel expenses to and from your home are not deductible business expenses.  The fact that the shed/office will have a bed for overnights (kitchen? bathroom?) does not disqualify it from being your office, but in some cases and for certain types of business arrangements, the fair market value of the lodging may be includable as taxable wages to employees.  This is something you should go over with your accountant, assuming you decide to go through with the plan at all after discussing the state income tax situation.  

Also, who is "we".  If two or more people start a business, how it is taxed depends on the legal form of the business, who the owners are, and what state the business is located in.

[Eileen19]

I do the books for my husband’s business. That’s the “we.”

So the complete purchase of the shed and the finishing it out are all deductible as a large business expenses that is depreciated?

[Eileen19]

Hi. Not sure I clicked the “reply” button on my reply. (  😉  ) if I did and this is redundant I apologize. 

I do the books for my husband’s business. That’s the “we.”

So the complete purchase of the shed and the finishing it out are all deductible as a large business expenses that is depreciated?

[Eileen19]

Yes. Thank you we already deal with dual state taxes and thankfully they offset each other. One state usually gets a bit more and the other state credits that tax payment.  (Live in OK, business in AR)

[Opus 17]

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@Eileen19 wrote:

I do the books for my husband’s business. That’s the “we.”

So the complete purchase of the shed and the finishing it out are all deductible as a large business expenses that is depreciated?

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In general, any purchase of something with an expected life of more than 1 year is an asset.  The shed is definitely an asset, and will depreciate.  Normal business property depreciates over 39 years but a shed might have a shorter life.  Then, improvements to the shed (utilities, insulation, etc.) are costs for improvements to the asset that are also depreciated.  For example, office furniture is depreciated over 7 years, while land improvements (sidewalk, parking lot, etc) are depreciated over 15 years.  This is all covered in publication 946.

There is a safe harbor that allows certain tangible assets with a cost less than $2500 to be expensed instead of depreciated--this might include tools, or a vehicle trailer.  I don't know if the shed improvements (utilities, kitchenette, toilet, etc.) will be eligible for that kind of handling, one of the other experts may know, or Turbotax may know when you enter the improvement (if you are eligible for special treatment, you should be asked).

And of course, you can only include costs you pay for.  You can't include the value of your own time or labor.  (You can also include costs like required inspections and permits.)

To put it more simply--if you had bought the shed as a fully finished office for a higher price, that would be a depreciable asset.  So if you buy a cheaper shed and pay someone to build it out for you, you can likewise depreciate the costs of the shed and the build-out.