Capital Expenditures versus Expenses / P&L

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Capital Expenditures versus Expenses / P&L

Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes

Hey all,
I have a good sized portfolio, approx 300 units. I have W2 staff managing and maintaining the units.

We have recently run into an issue where our P&L looks a bit rougher than it should. One main reason for this, is due to the work we are doing to improve units. I have never made a strong effort to break out payroll costs to capitalize them for the time spent on capital projects versus R&M.  There are other items also that I have on my P&L that I'm thinking I should capitalize to strengthen my P&L. This is slightly different than taxes per say, as my CPA will do different things with the numbers than we do with the P&L.

Couple of items I have on P&L now that I think I should capitalize?
- Hot water heaters
- Flooring replacements <$2500
- Window replacements(done in house)
- Appliances

Are there others out there that have a similar W2 labor setup that calculate hours to capitalize part of payroll? The issue is that my P&L doesn't look as strong as it should for DSCR issues. However, we are making mostly the right decisions because we are improving the properties with the extra money that we are spending.

Anyone out there in a similar situation?

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    3y

    Your books might be on a book basis and tax might be in tax. So they will be treated differently. Your book basis might be done a certain way to please lenders and tax to please your investors.  

    Each partnership must reevaluate to check your investor pool and what they would benefit from (capitalization or expensing - if that is an option). DSCR is also an essential factor.

    You might not need to capitalize payroll if you don't meet UNICAP rules. 

    - Hot water heaters - can be expensed but capitalization might help on different fronts depending on the investors. 
    - Flooring replacements <$2500 - can be expensed but capitalization might help on different fronts depending on the investors
    - Window replacements(done in house) - generally capitalized. 
    - Appliances - probably can be expensed but capitalization might help on different fronts depending on the investors




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  • Chase Gochnauer
    OP
    Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
    3y
    Quote from @Ashish Acharya:

    Your books might be on a book basis and tax might be in tax. So they will be treated differently. Your book basis might be done a certain way to please lenders and tax to please your investors.  

    Each partnership must reevaluate to check your investor pool and what they would benefit from (capitalization or expensing - if that is an option). DSCR is also an essential factor.

    You might not need to capitalize payroll if you don't meet UNICAP rules. 

    - Hot water heaters - can be expensed but capitalization might help on different fronts depending on the investors. 
    - Flooring replacements <$2500 - can be expensed but capitalization might help on different fronts depending on the investors
    - Window replacements(done in house) - generally capitalized. 
    - Appliances - probably can be expensed but capitalization might help on different fronts depending on the investors





    Thank you for that detailed response. I agree that our book/tax basis is different. I currently am the sole onwer/investor so I have nobody else to please. I am just struggling to determine what the "norm" is for expending versus capitalizing. My global DSCR doesn't look ideal for lender purposes, but it is because a somewhat significant part of our overall payroll and expenses are more capital related items. I had planned to begin capitalizing things, both book and tax(I do not need any additional deductions) that we hadnt previously, to help with this global DSCR. I imagine other larger investors have this same issue, I'm just surprised that I can't find more conversations around the topic. I'm not sure if we just truly are a bit more unique, or if we are missing something obvious, etc.

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