We’ve been asked before about the tax consequences surrounding business environmental clean-up costs. Although there are variations, the answer is usually pretty much the same: Clean-up costs must be capitalized, so there’s no current write-off for the business.
Alert: The results might be different for removing mold from a business building. Notably, the IRS allowed a write-off for mold removal in a private letter ruling issued back in 2006. The letter ruling is noteworthy because it established a unique rationale for this environmental hazard. (IRS PLR 200607003) Of course, a private letter ruling only applies to the party requesting it, but it does provide a good indication of how the IRS would interpret matters in a comparable situation.
Here’s the whole story: As you probably know well, your business can deduct all the “ordinary and necessary” expenses it incurs and pays during the year. This includes expenses for regular repairs that don’t prolong the property’s useful life or cause it to significantly appreciate in value. (You can’t currently deduct the cost of permanent improvements.) Facts of the ruling: One wing of a nursing home became mold-ridden due to excessive moisture. The owner removed the mold by tearing out most of the drywall and fixtures, and replacing the moldy drywall with new drywall of similar quality. The owner then painted the drywall and reinstalled the old fixtures. Based on these facts, the IRS determined that the owner could deduct the mold remediation expenses as ordinary and necessary business expenses. It cited four reasons:
1. The building use stayed the same.
2. No structural alterations were made.
3. The mold problem didn’t appear until after the owner had acquired the building.
4. The work didn’t prolong the building’s useful life or cause it to appreciate in value.
The situation differed from prior rulings involving asbestos remediation. In those rulings, the IRS separated out encapsulation expenses from removal costs. It said encapsulation costs may be deducted currently, while removal costs must be capitalized. However, encapsulation is not an option for mold; removal is the only solution.
Tip: This ruling doesn’t apply to a personal residence.