New Tax Law: Property Tax Write-Offs For Businesses

Property taxes can be a significant expense for businesses, but the good news is that they may be tax-deductible. This is a strategic move that can lower your overall taxable income. The IRS allows property tax deductions but has set specific criteria. Generally, you can only deduct taxes in the year you pay them, and tax regulations vary by state, so consulting local tax authorities is essential. Allowable expenses typically include basic property taxes levied by federal, state, and local governments, as well as certain local benefit taxes related to maintenance, repairs, or interest. Business property taxes are based on the assessed value of the company's land and buildings, with the property type and location influencing the tax amount. This guide will explore the criteria for writing off property taxes under the new law and provide insights into other tax deductions relevant to businesses.

Commercial property tax deductions

Commercial property owners can take advantage of several tax deductions. Firstly, commercial property investors can deduct a certain amount from their income taxes each year to account for building wear and tear. The IRS permits owners to depreciate commercial buildings over a 39-year period. For instance, an investor purchasing a $5 million commercial building can claim approximately $128,000 in depreciation each year.

Additionally, investors can order a cost segregation study from an engineering firm, which can help identify aspects of a property that can be depreciated over a shorter period, such as five or ten years. Due to new regulations in the Tax Cuts and Jobs Act of 2017, some investors can take up to 100% of a property's value as a depreciation deduction in their first year of ownership, until at least 2025. However, investors will eventually have to pay back the IRS when they sell the property, in the form of depreciation recapture.

Commercial property investors can also deduct any interest paid on a commercial mortgage from their federal income taxes. Furthermore, building owners can claim tax deductions if they increase their building's energy efficiency by at least 25%. This deduction falls under the Internal Revenue Code (IRC) Section 179D and was expanded under the Inflation Reduction Act of 2022.

In addition to mortgage interest costs, commercial investors can deduct property repairs, maintenance costs, certain property management expenses, and other operating expenses from their income taxes. This includes travel costs to and from a rental property, such as hotel expenses and 50% of food and beverage costs. Investors can also deduct the costs of real estate investment-related seminars, conferences, and conventions. However, general property improvements, such as renovations or new furnishings, cannot be claimed as deductions in the year they are incurred but must be depreciated over the regular life of the property.

Business use of home deductions

If you work from home, you may be eligible for a home office tax deduction. This applies if you use a portion of your home for your business on a regular basis. This includes a house, apartment, condominium, mobile home, boat, or similar structure. Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients.

To qualify for the home office deduction, you must meet one of the following criteria:

• Exclusive and regular use: You must use a portion of your home for your business on a regular basis. This includes structures on your property, such as an unattached studio, barn, greenhouse, or garage.
• Principal place of business: Your home office must be the principal location of your business. To determine this, you must consider where you perform your most important business activities and where you spend most of your business time.

The IRS provides a simplified method to calculate your expenses for business use of your home. This method uses a prescribed rate of $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet.

Deductible expenses for business use of your home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. You may not deduct expenses for parts of your home not used for business, such as lawn care or painting a room not used for business.

Tax credits and deductions

Property taxes can be deductible, but there are limitations and restrictions on what portion of your property tax is deductible as a business expense.

If your business owns real estate, you must pay property tax on this property. The property tax is calculated by multiplying the property tax rate by the percentage of the value of the property that is taxed. The value of a property for property tax purposes is not the same as the fair market value.

As an individual, your deduction for state and local taxes (SALT) is limited to a combined total deduction of $10,000 ($5,000 if married filing separately). You may be subject to a limit on some of your other itemized deductions as well. You may not deduct certain taxes and fees on Schedule A, including but not limited to federal income taxes, social security taxes, transfer taxes, stamp taxes, homeowner's association fees, and estate and inheritance taxes.

If you use your home for business, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. These expenses include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. You can use the regular method or the simplified safe harbor method to compute the business use of home deduction. The safe harbor method allows qualifying taxpayers to use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the deduction.

If you are in the farming business and file Schedule F (Form 1040), Profit or Loss From Farming, or a partner with unreimbursed partnership expenses, you can use the "Worksheet to Figure the Deduction for Business Use of Your Home" in Publication 587 to figure your deduction. If you are using the simplified method, use the "Simplified Method Worksheet" in the same publication.

Tax preparation and filing

When it comes to tax preparation and filing, businesses have a lot to consider. Firstly, it's important to understand the difference between tax credits and tax deductions. A tax credit directly reduces your tax bill, whereas a tax deduction reduces the income you're taxed on, which can result in a lower tax bill.

Property Tax Deductions

Property taxes can be deductible for businesses. The IRS allows property tax deductions but sets specific criteria. Generally, you can only deduct taxes in the year you pay them, and the deduction only applies to taxes actually paid during the year. Commercial landlords, self-employed workers, and small business owners who own property solely for commercial purposes can qualify for this deduction. The property type and location impact the amount of tax to be paid, and each state and local jurisdiction may calculate the amount differently. Allowable expenses typically include basic property taxes levied by federal, state, and local governments, as well as certain local benefit taxes for maintenance, repairs, or interest related to public services. However, it's important to note that charges for local benefits that could increase the value of business property, such as street and sewer assessments, are generally non-deductible.

Business Use of Home Deductions

If you run a business from home, you may be able to deduct a portion of your home-related expenses. This includes expenses such as homeowners insurance, homeowners association fees, cleaning services or supplies used in your business space, mortgage insurance and interest, and utilities like electricity, internet, heat, and phone. The amount you can deduct depends on whether the expense is direct (benefiting only your home office) or indirect (benefiting your entire home). For indirect expenses, you can calculate the business percentage of your home and apply that to the expense. For example, if your office is 75 square feet and your home is 1,000 square feet, you can deduct 7.5% of your rent or mortgage. The IRS offers a simplified option, allowing qualifying taxpayers to use a prescribed rate of $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet.

Other Tax Deductions

In addition to property tax and home office deductions, businesses can also deduct various other expenses. These include federal, state, local, and foreign taxes that directly affect the business; business insurance, provided it is ordinary and necessary for the business; travel expenses reimbursed under an accountable plan; supplies and materials consumed or used within a tax year; and fees for professional services such as accounting, consulting, legal, or contract labor, as long as they are ordinary and necessary.

Tools for Filing

There are several tools available to assist with tax preparation and filing, such as TurboTax and NerdWallet. These platforms offer free or paid versions, depending on the complexity of your tax situation. They can guide you through the process and help ensure you take advantage of all the deductions and credits available to you.

State and local taxes (SALT)

The State and Local Tax (SALT) deduction allows taxpayers to subtract up to $10,000 in property, income, or sales taxes paid to state and local governments during the tax year. The cap drops to $5,000 if you're married and filing a separate return. Property taxes include those paid on both real and personal property. It is important to note that you cannot claim both sales and income taxes. You must select one or the other. However, income taxes are not limited to those that came due during the current tax year. Older tax debts can be claimed if you paid anything towards them during the current year.

The SALT deduction is an itemized deduction that taxpayers can use when filing their annual tax returns. It is worth noting that taxpayers who use the SALT deduction cannot claim the standard deduction. The SALT deduction has been a subject of debate, and the rules for claiming it remain in place through the tax year 2025. Before the Tax Cuts and Jobs Act (TCJA) of 2017, there was no dollar limit to the amount of paid taxes that could be deducted. The concept of deducting state and local taxes from income has been part of the federal tax code since 1913.

The average SALT deduction ranged from about $11,000 to more than $103,000 before the $10,000 TCJA limit. The amount depended on how much an individual paid in state and local taxes during the year. The change to a $10,000 limit (or $5,000 for some taxpayers) was not well-received when the TCJA went into effect, and it provoked some debate. The Tax Foundation, a nonpartisan tax policy nonprofit, claimed that the SALT deduction primarily benefits high-income earners who pay significant amounts of these deductible taxes.

In terms of business use, deductible expenses for business use of a home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. The business use of home deduction can be computed by dividing expenses between personal and business use. Direct business expenses can be deducted in full, and indirect total expenses of the home can be allocated based on the percentage of home floor space used for business. A simplified option, the safe harbor method, allows qualifying taxpayers to use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of the home deduction.

Frequently asked questions