Commercial Development Taxes

[Cole North]

Hello, we are working to develop a commercial property and are consulting with a CPA to assist with our taxes. We've spent over $100k in development costs so far (architecture, engineering, permitting, legal fees to sort out easements, etc.) so I want to make sure our taxes are being done correctly. I assume this is a common situation on here and I want to make sure we're getting good advice from the person filing our taxes. I tried doing a search on the forum but couldn't find anything. My understanding is that he is saying that some of this would be included in our basis for the actual construction and some of it would be classified as startup costs. Neither of which can we write off until we open the business for operation and it seems that all of the expenses are only depreciable over time (15 years for anything classified as startup costs which starts to phase out at $50k) and 39 years for the remainder. I'm not a tax person and this is our first development so just want to make sure this all makes sense to someone more experienced. I'm happy to dig in and research more but just feel like I'm getting stuck, thanks in advance for any help/guidance!

[Linda Weygant]

Sounds like you've got a great CPA who really understands property development.

Yes - StartUp costs are amortized over 15 years, except for the first $5000 which can be expensed in the first year of operations.

For anything directly related to the land development - pretty much the entire list of what you wrote out - becomes part of the cost basis.  That cost basis will then be recognized as you sell the land.

Tax and accounting utilizes The Matching Principle, meaning that you always match expenses with associated revenue.  If you're going to be renting out the development rather than selling, then yes - everything associated with the development becomes depreciable over either 27.5 years or 39 years depending on whether it's residential or commercial property.

Excellent choice in CPA!

[Cole North]

@Linda Weygant

Thanks so much Linda, very appreciative for your insight and advice, glad to hear that the person we hired seems to know what they're talking about!