Capital Expenditures vs. Deductible Repairs

To Capitalize or Deduct

The IRS issued final guidance to taxpayers in the repair regulations that refines and clarifies the treatment of costs incurred for acquisition, repairs, or improvements of tangible property. This guidance constitutes a change for most taxpayers resulting in a tedious process of documentation now required for write-off’s over and above safe harbor limits.

However, if applied correctly, these guidelines will provide additional write-offs, reduced tax liability, and a safer tax filing position.

It’s all about CONTEXT…
A refined definition has been provided for the “Unit of Property” (UOP), or building systems as they apply to real property, plant property and network assets. This definition for building systems requires a contextual comparison of repair costs to each system rather than the overall building. The structure includes walls, doors, windows, roof and concrete while the smaller systems are defined as:

• HVAC System
• Electrical System
• Plumbing System
• Escalators
• Elevators
• Fire Protection & Alarm
• Security System
• Gas Distribution

The IRS has placed new regulations on what you can expense and what you should capitalize.

Repairs & Maintenance

Repair costs are defined as any cost that is incurred for the purposes of keeping the property in ordinary, efficient operating condition and that do not improve the property.

Routine Maintenance

Definitions for routine maintenance have been extended to include building maintenance and are defined as costs that the taxpayer reasonably expects to perform more than once in any ten-year period. There is no monetary limit applied to routine maintenance costs.

Improvements, which must be capitalized, are defined as:
• Betterment: fixing a defect, a material addition to the property, or an increase in capacity, efficiency, strength, or quality of the UOP.
• Adaptation: amounts paid to adapt a property to a new or different use.
• Restoration: bringing it back to “like-new-condition”, or returning it to ordinary operation

Disposition/Retirement of Assets

Taxpayers should be aware that disposition is the opportunity to write-off any remaining basis when a system or component is removed or retired from use.


What Engineered Tax Services can do for you:

Under the Final Treasury Regulations, an engineering based Cost Segregation or Fixed Asset review has proven to be the best way to ascertain the highest benefit and become compliant. Taking immediate advantage of additional write-offs for repairs, routine maintenance & dispositions even on a look back basis may result in a significant tax adjustment without amending your taxes! Call today for more information, 800-236-6519.


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