Rental property purchased using SBA proceeds

[JPROSBALLC]

New client asked... .
I purchased the office building in 2020 as an SBA loan. This property went through a big remodel that I spent around $300k on. I do have receipts for it. I was told that I can’t write anything off but I can provide those upon resell to pay less on capital gains.
Why would the CPA not allow the leasehold improvement because it was purchased using SBA funds?
Would this restriction be included in the loan documents?
Trying to respond but my experience w/SBA funding is limited. (Working on it)
Thank you in advance... DJ

[BOB W]

Was it free money or a loan to be paid back? If a loan to be paid back then you are entitled to treat all improvements as part of your adjusted basis for computing gain or loss.
As well as currently depreciating current improvements over life expected.

[TaxGuyBill]

Why would the CPA not allow the leasehold improvement because it was purchased using SBA funds?

The source of the funds doesn't matter.

If I had to GUESS, the prior tax preparer told the taxpayer they can't DEDUCT the expenses (it need to be depreciated), although depending on the timing and details some of it may qualify for Qualified Improvement Property (which would get Bonus depreciation).

[JPROSBALLC]

Prior CPA told taxpayer not to depreciate the improvements - save receipts and when he elects to sell, add those cost to his basis to reduce gain.
Taxpayer is not flipping property and expect to own for several years.
My thoughts - He is missing the annual depreciation deduction. The rental property's annual income, barely covers expenses at this time. (Not sure why he doesnt increase rent). Adding in depreciation would create a loss. Which is what puzzles me as to why the CPA instructed him to hold on to the leasehold expenses.
He can add the improvements to 2023 - not use prior years (that benefit is lost) - but benefit now, with the understanding the depreciation would be recaptured at time of sell - possible result in gain.

Does that sound right?

[Uncle Sam]

Prior CPA apparently was wrong in advising the client not to depreciate the improvements. What you could do is file amended return to pick up depreciation not previously claimed.
Section 481 adjustment. Have property values been effected by those capital improvements. May have been advice to not claim Sec 179 depreciation on it.

[Lion]

Form 3115...

[TaxGuyBill]

As was noted above, if it was placed in service in 2020, the only way to fix things now is Form 3115. You can't start depreciating it now unless you file Form 3115 (which will also allow you to 'catch up' on the missed depreciation).