Cost of removing building mold is currently deductible ( PLR 200607003 )
In welcome news for taxpayers affected by the sometimes devastating cost of a mold condition in a structure, IRS has privately ruled that the business cost a taxpayer incurred on a project to remove mold from a building it owned and leased out was deductible as an ordinary and necessary expense under Code Sec. 162.
Environmental clean up expenses. Generally, repairs are deductible as an ordinary and necessary trade or business expense under Code Sec. 162 if they merely keep the property in an ordinary, efficient operating condition. But expenses must be capitalized if they're needed to place the 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 the property's value, substantially prolongs its useful life, or adapt it to a new or different use. ( Code Sec. 263(a) , Reg. 1.263(a)-1(b) , Reg. 1.162-4 ) These rules also apply for environmental cleanup costs. ( Rev Rul 94-38, 1994-1 CB 35 )
For example, IRS has ruled that a taxpayer's costs for encapsulating (i.e., covering or re-wrapping) exposed and damaged asbestos-containing pipe insulation were deducible repair costs. The encapsulation neither materially added to the value of the property nor appreciably increased its life. Encapsulation didn't adapt the property to a new or different use by allowing the taxpayer to operate on a changed, more efficient, or larger scale. The encapsulation was a temporary measure that would require further work if the materials became damaged or punctured in the course of normal operations. ( PLR 9411002 , PLR 9240004 )
On the other hand, IRS and some courts have treated the costs of removing asbestos-containing materials from a building as a capital expenditure. The removal results in an improvement in the property because it reduces or eliminates human health risks and thus increases the value of the property. ( PLR 9411002 , Dominion Resources Inc, (2000, CA4) 86 AFTR 2d 2000-5443 , affg (1999, DC VA) 83 AFTR 2d 99-1350 , Norwest Corp & Subsidiaries, (1997) 108 TC 358 ) However, in Cinergy Corp, (Ct Fed Cl 3/10/2003) 91 AFTR 2d 2003-1229 (see Weekly Alert 1 03/20/2003 ), the Court of Federal Claims has more liberally said that removal and encapsulation costs of asbestos were deductible.
Facts. a taxpayer we'll call NurseCo owned a building which it leased to tenants that use the building to operate a skilled nursing facility. To the best of NurseCo's knowledge, there was no mold in the building when it bought it. However, NurseCo later learned that due to a series of roof leaks and condensation from heating, ventilation, and air conditioning lines there was a severe mold problem in one of the building's wings. NurseCo undertook a mold remediation project to remove the mold and restore the building to its physical condition before the onset of mold. It removed and replaced approximately 70% of the wall and ceiling drywall in the wing. It also removed and replaced faucets, sinks, and most of the electrical fixtures (reusing these items in many cases). The new materials used were substantially similar in quality to the replaced materials. The existing floor plan was not altered, and no structural components were repaired or replaced.
IRS ruling. IRS ruled that the cost of NurseCo's mold remediation project was deductible as an ordinary and necessary business expense under Code Sec. 162 . The mold was not present when NurseCo bought the building, and the project did not structurally alter the building or adapt it to a new or different use. Both before and after the project, the building was suitable for use as (and was in fact used as) a skilled nursing facility. IRS concluded that the mold remediation did not increase the value of the building or appreciably prolong its useful life. Instead, it kept the building in ordinarily efficient operating condition.
Observation: Thus, IRS treats mold removal in a much more liberal fashion than asbestos removal, allowing the taxpayer to currently deduct the expense rather than having to capitalize it. Possibly, this is because removal is the only effective way to deal with mold. Asbestos, on the other hand, can often be addressed by encapsulation or other treatments short of removal.
Observation: It wouldn't necessarily matter if a taxpayer was at fault or in some way contributed to a mold problem. For example, if the taxpayer used the wrong type of drywall (i.e, not moisture resistant where such was called for) in a previous repair, that fact wouldn't have to affect the outcome. Under the restoration principle, if a taxpayer acquires property in clean condition, and contaminates the property in the course of its everyday business operations, the expenses of restoring it to its former condition can still be deductible.
Observation: The mold removal would have had to be capitalized if it was done as part of an overall rehabilitation or renovation plan.