In our effort to help gym owners this month with fully understanding the often illusive topics of Finance and Insurance, we are focusing all our efforts in Hub on these two topics. As part of this effort, we’re leaning into our good friends and trusted experts in these areas – John Briggs (Incite Tax) and Vaughn Vernon (Affiliate Guard). Their mission is to help gym owners understand their finances and make sure they are covered when they need it.
Below is a guest post from John Briggs.
I’ll first say that if possible, meaning you can afford it (down payment and monthly payments), buying the space you operate out of is a good wealth building strategy.
So for the sake of what I’m going to share, let’s assume that financially buying your gym space makes sense.
Own the Building in a Separate Business
First thing we recommend is that you own the building in a separate business. Either a single member LLC or a partnership owned by you and your spouse.
With the building owned by a separate business (which would have a separate bank account) your operating gym would pay rent to this newly formed business.
So nothing really changes for your gym. It would still have all the expenses it normally does when you were renting from someone else. Whatever costs your gym would have covered as a tenant, it will still do that. It will also still expense the rent payments.
Collect Rent (from yourself) and Claim it as Income
Your commercial building business will collect those rent payments and claim it as income. This new business will be the one that makes the mortgage payment and it will cover the expenses that normally your landlord would cover.
Claim a Tax Deduction from the Mortgage Interest
From the tax side, you get to claim a tax deduction for the mortgage interest. (Not the principal payments on the loan and not the down payment.) You will also have property tax and probably repairs and maintenance expenses. And as always, expense every business related purchase.
Take Depreciation on the Building
And then you get a “non-cash” tax deduction by taking depreciation on the building. The IRS says that because you own something that will continue to have and produce value for how ever many years, that you can take the expense of that “asset” over those “how ever many years.”
And don’t worry, the IRS has already told us how many value producing years all these types of assets have. And for a commercial building, they say 39.5 years. So to calculate your tax deduction for this depreciation you take the purchase price of your building and divide it by 39.5 years. So a building that costs $500,000 would give you $12,755 in a tax deduction every year.
And that covers the basics of buying your gym space.
Want more help with topics like these? Check out Hub.