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Sunday, April 16, 2006


Generally, expenses are capitalized if they are made to place property in an ordinarily efficient operating condition (as in the case of expenses to remedy a condition that existed when the property was acquired), or if they add to a property's value, substantially prolong its useful life, or adapt it to a new or different use. From an income tax standpoint, most taxpayers would rather have a current ordinary and necessary expense and not a capitalized expense. A current expense can be used to generate an immediate income tax deduction - a capitalized expense gets added to the tax basis of an asset and provides a tax benefit only by depreciation or amortization deductions over time or as reduced gain on sale.

The IRS and some courts have treated the costs of removing asbestos from a building as a capital expenditure because it results in an improvement in the property by reducing or eliminating human health risks. With enhanced concerns about the negative health aspects of mold, in recent years mold removal has increased. Since asbestos removal and mold removal seem to share many common attributes and purposes, there has been a concern that mold removal costs would be treated by the IRS in the same manner as asbestos removal costs - that is, as capital expenses.

In a favorable private letter ruling, the IRS has issued a private letter ruling that mold removal costs by a building owner who leased out the building was not a capital expenses, but a currently deductible ordinary and necessary business expense. In the ruling, the IRS noted that the removal project did not structurally alter the building or adapt it to a new or different use - so remediation actions that do involve structural alterations or adaption to a new use may end up with capitalized expenses. PLR 200607003.
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