Among other things, this week I’ve been working on the new office design with our architect, Roy Leone [flash site].
One of the problems with our cool office here on 8th Avenue is that we outgrew it too quickly. The construction of the second half of the office cost us $100 per square foot of which the landlord only paid $30. All of that money went into walls, desks, bookshelves, and a fishtank which we’ll use for about two years and then abandon. There’s a good chance that the next tenant will have their own ideas about workspace and demolish everything we did. All in all, it’s a big waste of money and environmentally unsound.
Worse, when you spend money on construction like this, it’s not really deductable. Here’s an example. Let’s say your revenue is $100. Your expenses were $80, leaving you with a profit of $20.
Now, let’s say you spend that $20 on office construction (what the IRS calls “leasehold improvements.”) It’s not deductible yet. You have $0 in the bank, but the IRS thinks you made a $20 profit. Now you have to pay the corporate income tax (35% federal plus 11% or so for New York) on the $20 even though you don’t have the $20.
[Technicality: when you move out, you can deduct it all, and you can depreciate it at a rate of approximately 1/39th the amount per year, so you could really deduct fifty cents of the $20.]
We’re going to need a much bigger space now: on the order of 15,000 square feet. To build that much office space could cost a couple of million dollars. With the lack of deductability, your bank account goes down by three million dollars. The landlord will pay a fraction of that, but not enough to make it affordable.
There’s a loophole. Office furniture can be depreciated much faster than leasehold improvements, over 7 years. So for $20 of office furniture you can deduct about $3 a year: better than nothing. Even better, office furniture is a real asset, so you can lease it. Now you’re not out any cash, just a convenient monthly payment, which is 100% deductable.
This is why companies build cubicle farms instead of walls, even though the dollar cost is comparable.
I think I’ve got a good workaround. We’re looking into manufactured walls. They’re reusable, recyclable, environmentally friendly, you can take them with you when you move, and you can finance the purchase. A reader who works for Haworth emailed me to suggest their Enclose walls system (illustration at right). I visited their New York showroom and they look great, so we’re working on figuring out a totally standard set of parts we can order from Haworth for each private office to create the same extremely nice diagonal offices that we’ve built in the past out of drywall, metal studs, and acrylic.
[PS Please do not take tax advice from me. I am morbidly unqualified to give tax advice. Ask your tax lawyer or CPA.]