By Karen E. Klein
Q: In November, 2004, I had a swimming pool built at my house for the purpose of starting a water aerobics business. I plan to use the pool 70% for business purposes and 30% personal. Can I deduct this as a business expense, claiming depreciation and a Section 179 expense deduction? -- K.W., Tucson, Ariz.
A:You've got quite a question there -- one that split our tax experts! The definitive answer to your question hinges on whether your swimming pool is considered a place of business, or a business asset, says Joshua P. Hayes, a CPA and tax manager at Eide Bailly (http://www.eidebailly.com) in Billings, Mont. His firm considers it the latter. "It doesn't taint the deductibility of a business asset if I use it in some personal context," Hayes says. "For instance, if I have a company laptop that I take home on the weekends and use to check my personal stock prices, I can still deduct a portion of that laptop as a business asset. The same goes for a company car."
YES, NO, MAYBE.
But John Concannon, CPA and senior tax manager at Rothstein Kass in Roseland, N.J., sees things differently. "No deduction would be allowed for the swimming pool's cost, either as a business deduction or a Section 179 expense deduction," Concannon says, citing IRS rules that govern the business use of a home. Those rules say that in order to be deductible, the portion of your home used for business must be used exclusively for the business or trade. "You do not meet the requirements...if you use the area in question both for business and personal purposes," he says.
Hayes disagrees. "Building the pool was a necessary expense incurred to carry out your business, which means it is deductible as long as it is used for a for-profit entity," he says. "Substantiating the business usage could be a challenge in this situation, and we recommend that meticulous records are kept, documenting people and times of all usage, both business and personal."
You also need to make sure that your water aerobics business operates with a profit motive in order to take the deduction, according to Hayes. "As a rule of thumb, an activity is afforded the presumption of a profit motive if it shows a profit for any three-or-more out of five consecutive years," he says. "If the venture fails to show the requisite profit motive, the tax code has rules in place to limit the deductibility of the venture's expenses."
Although the situation is not black and white, Hayes says, the pool is likely to be considered a land improvement, which means you would be precluded from benefiting from the Section 179 immediate expensing election. "Provided certain other requirements are met, the cost may be eligible for 50% or 30% bonus depreciation, in addition to normal depreciation deductions," he says.
So what do you do now? Consult a good local tax attorney familiar with issues affecting small-business startups. Such an expert can meet with you and look over your pool and home, if necessary. Along with providing a definitive answer to this question, the meeting will provide you with a good opportunity to establish a relationship with an accountant. You will need someone who can work with your business on issues such as what business entity you should establish, how to predict cash flow and return on investment, obtain loans, and write a business plan, as well as filing your tax return. Good luck!
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Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues