If last year your business made repairs to tangible property, such as buildings, machinery, equipment, or vehicles, you may be eligible to deduct the expenses on your 2016 income tax return. However, you must determine if the expenses qualify as “repairs,” and are not actually “improvements.”
The distinction between repairs and improvements is important. In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized and depreciated over a period of years. But, you can take an immediate expense for the costs incurred for incidental repairs and maintenance.
You are considered to have made an improvement to a unit of property when you meet any one of the following criteria:
- Betterment – You make a betterment to a unit of property when you incur expenses for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of a unit of property or that is a material addition to a unit of property.
- Restoration – You make a restoration to a unit of property when you replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.
- Adaptation – You make an adaptation to a unit of property when you adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.
2 Safe Harbors
Distinguishing between repairs and improvements can be difficult since there are no bright-line tests. However, a couple of IRS safe harbors can help:
- Routine Maintenance Safe Harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.
Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.
- Small Business Safe Harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.
There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact me for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions. You can reach me at HZemel@BerdonLLP.com or contact your Berdon advisor.
Hal Zemel, a Tax Partner at Berdon LLP, New York Accountants, has nearly 25 years in public accounting and advises businesses in the manufacturing, distribution, advertising, and real estate sectors.