The Tax Benefits of Buying a Building for Your Business
Are you a small business owner tired of renting commercial space and looking for an intelligent way to strengthen your business? If so, buying a building for your business is a viable option, as it gives you more control over your business and helps lower occupancy costs with mortgage payments. Also, purchasing a building for your business helps to secure your space and future.
Whether you purchase a small condo or a sizable building, a commercial property offers several tax benefits for a small company. Here are the tax benefits of buying a building for your business.
At CDC Small Business Finance, part of the Momentus Capital family of organizations, we offer commercial real estate loans to business owners who wish to buy, construct or improve their commercial real estate. And we provide personalized guidance in navigating the financial process and assist you in unlocking the fantastic benefits of owning a building for your business.
SBA 504 Loan: A Smart Way to Buy a Building
While buying a building for your business offers a wide range of benefits, the high cost of buying houses may be challenging. CNBC reports that California is the second most expensive state to buy a home in the U.S.
However, suppose you want to buy a building for your business but are concerned about financing. In that case, an SBA 504 loan is an option to consider. An SBA 504 loan program offers long-term financing for significant fixed assets that enhance business growth and helps businesses to create new job opportunities.
This loan program can finance up to 90% of the building’s purchase price, meaning you’ll only need 10% of the total cost. However, for you to be eligible for an SBA 504 loan program, your business should:
- Have a tangible net worth of $15 million or less
- Operate as a for-profit business within the U.S. or its possessions
- Have an average net profit after tax of less than $5 million
Benefits of an SBA 504 Loan
There are several reasons why SBA 504 loans are a go-to for small business owners, including the following:
- Prolonged amortization periods: The Small Business Administration (SBA) 504 loans have an amortization period of up to 25 years, depending on the assets being financed. Thus, they permit you to spread your payments over a more extended period, reducing the amount paid monthly.
- Fixed-rate interests: In an SBA 504 loan, the interest rate is set when the loan funds and is generally tied to ten-year US Treasury rates. However, the loan will have a fixed rate, typically below the current market.
- Fully Amortizing: SBA 504 loans do not have balloon payments; therefore, you will pay without worrying about making huge payments at maturity or needing to refinance.
- Low down payment: SBA 504 loans provide a low down payment of 10% of the total project. Therefore, you can conserve your business’s cash flow and invest in other business areas.
- Cash savings: SBA 504 loans can help you increase the cash flow of your business by providing you with low, fixed-rate financing. Additionally, with these types of loans, most of the fees are eligible to be financed into the project. Thus, the total amount needed to close will be much less than a conventional loan.
Like any other asset, a commercial property wears down over time. Therefore, you can deduct a certain amount from your income taxes. Right now, commercial buildings are depreciated for over 39 years. So, buying a commercial establishment for $5 million can create approximately $128,000 of depreciation.
This deduction typically reduces your taxable income, leading to potential savings based on your tax rate.
Interest Expense Tax Deductions
You can deduct interest on your mortgage and commercial mortgage payments. As a result, lowering your taxable income and reducing your overall tax liability is easy. For example, if you’re paying $10,000 monthly with $2,000 interest, you can take a mortgage interest tax deduction of around $24,000.
Qualified Business Income Deductions (QBI)
Section 199A of the 2017 Tax Reform Act permits pass-through income earners, including individuals, trusts, and estates, to deduct up to 20% of their eligible business income from their taxable income.
However, limitations for QBI include the greater 50% of W-2 wages paid for 25% of W-2 wages paid and 2.5% of the property.
Maintenance, repairs, and upgrades are tax benefits of buying a building for your business. While they are out-of-pocket expenses, these expenses improve your building’s value. In addition, condo fees associated with purchasing a building will be deducted if you use the property for your work.
The Opportunity Zones are designated low-income communities that provide tax incentives to stimulate economic and investment development. The Opportunity Zones Program allows individuals to defer eligible capital gains until December 2026 as long as they invest in an Opportunity Fund.
So, purchasing a building for your business in the Opportunity Zones makes you eligible for tax benefits. If you hold the property for at least five years, you may take advantage of a 10% reduction in capital gains. In addition, if you own the property for at least seven years, you’re eligible for a 5% reduction in your capital gains.
Reduce Tax Burdens for Beneficiaries
Commercial properties usually have tax benefits for both the owners and their heirs. Therefore, if your beneficiaries decide to sell your property, they’ll pay tax on the increased value from when you died. For example, suppose you bought the property at $4 million, and its value increased to $6.5 million at the time of death. Then, if your beneficiaries decide to sell, they’ll only need to pay taxes on the $2.5 million the property appreciates.
Contact a Loan Expert Today
As a small business owner, buying a building for your business can bring many tax benefits, improving your finances in the long run. With the SBA 504 loan program, you can access affordable financing to make your property purchase a reality.