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“Recent tax court cases have changed the way companies treat improvements to tangible property and is generating significant tax benefits for many business owners.”
If you perform regular maintenance and repairs to your assets, you may be able to recapture thousands of dollars by reclassifying improperly classified capital expenses as deductible costs to accelerate depreciation. Through IRC Section 481(a), routine and incidental repairs and maintenance costs may be adjusted to reduce taxable income in the current tax year and increase any net operating loss (NOL) for a potential carry-back up to five years.
A variety of industries may benefit from these rules, including those in the banking, retail, hospitality, manufacturing, pharmaceutical, warehouse, distribution, and utility industries — to name a few. The rules may apply to most capital-intensive companies that invest significant dollars on routine and incidental repairs and maintenance expenses.
Capital expenditures include those for building improvements or other long-term betterments, new equipment, architectural fees – even the cost of defending or perfecting your title to the property. Generally, a capital expenditure either adds an asset or increases the value of an existing one. Whether it’s a deductible repair or a capital improvement often depends on the context. For example, if an expenditure is part of a general plan of rehabilitation, modernization or improvement to equipment or other business property, it usually must be capitalized even though by itself it would be currently deductible.
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
• Fire Protection & Alarm
• Security System
• Gas Distribution
The IRS has placed new regulations on what you can expense and what you should capitalize.
An engineering-based Cost Segregation study is a simple way to quickly become compliant and to identify each of the building systems outlined by the IRS. Many taxpayers are taking of advantage of the well-established Cost Segregation practice on existing buildings to assist with compliance to the new regulations and realize future opportunities for disposition (explained in more detail below), and the ability to document repair and maintenance costs. For more information on Cost Segregation click here (https://engineeredtaxs.wpengine.com/cost-segregation/ ) or for a quote click here (https://engineeredtaxs.wpengine.com/cost-segregation-information-request )
• Substantially prolong useful life (including replacement of deteriorating assets)
• Materially increase value
• Adapt the property to a new or difference use
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.
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
• Roof repairs
• Replacing lighting
• Resurfacing parking lots
• Replacing doors and windows
• Resurfacing interior or external floors
• Painting (interior or exterior)
• Rekeying locks
At ETS we also provide disposition or abandonment studies to identify old building components that were not removed from a taxpayers books when they were retired. These new IRS regulations (T-Regs) provide detailed guidance on how to dispose of these assets and encourage taxpayers to take these additional write-offs annually as they improve tangible property. Without an engineering based Cost Segregation study, this is difficult to do. So the application of our engineering studies has become more beneficial than ever! Give us a call for a free analysis.
An analysis of your capitalized remodeling costs might uncover significant tax deduction opportunities. Contact Engineered Tax Services today to get your tangible property regulations study started.
For a complimentary analysis, please contact engineered tax services at https://engineeredtaxs.wpengine.com/contact/.