Business Expense or not

[Terry D EA]

Client is having a building built that he will use for both personal and business. He paid for the building in 2017. He is a sole proprietor and took 5k from business funds toward the down payment on the building. The 5k represents 1/3 of the building which will be used exclusively for business. Can the 5k be deducted as an expense as it will be used to construct the portion used for business. Wouldn't this be the same as a remodel for business purposes that would be a direct business expense. The building is one solid structure and not portioned off. At first thought I said no.  After giving it some more thought, it looks as though he might be able to do so. I looked at using the safe harbor method for business use of the home but am not sure about using this either. 

[Pacun]

You will need to use depreciation 40 years straight line.

[Abby Normal]

I'm ok with it. But 5k over 39 years is 128 a year. I'd probably go with simplified home office, instead and leave the 5k as an owner draw.

This sounds like a shed or outbuilding on their residential land. Is it heated and has electricity? Does that even matter for simplified home office?

[jklcpa]

Terry mentioned "remodel", and that term has specific application and requirements in the repair regs for retailers and restaurants, and then at the end of his post he also mentioned home office.  I don't think that the term "remodel" in the repair regs can be applied to residential home offices, not directly in its application nor as a logical justification of similar deductions in other circumstances.

First, it's a new structure that isn't in service at the end of 2017. Second, I think the entire capital costs of the structure should be accumulated and, when placed in service, depreciated by applying the business use % like would be for any other home office space. Then, weigh the actual costs including that depreciation against the safe harbor for home offices.

The $5K from the Sch C sounds like nothing more than a draw and not any sort of deductible expense in 2017.

[Terry D EA]

Thanks everyone, Judy you did clear up my thinking. This client asked me so many questions in one interview and threw out various scenarios for me to consider, it became easy to get confused. Some home, he thought the 5k would be taken off as an expense because it was business funds used as a deposit to the building. The building is not finished nor is it in service. Knowing this validates my very first response that it is not deductible this year and all other expenses should be figured in the total cost then begin the depreciation. All is not lost but I hope I can put his mind at ease a bit.

Thanks again