My CPA & I are in a debate about how to categorize reno expenses

[Fabiola F.]

This is a case of where my accounting MBA background plus what I read online is in conflict with my CPA's  knowledge. 

In filing my business returns (S-corp), my CPA seems to think that renovation expenses should go into the cost basis of the property instead of being categorized as improvements that can be depreciated. My CPA is also wanting to depreciate the entire renovation expense over 27.5 even though there's personal property components with a 5 yr depreciable life where we could take advantage of 100% bonus depreciation.

I argue that improvements shouldn't go into the cost basis and instead as operating expenses since the renovations were done under the normal course of business especially since a nice chunk is for labor/contracted services as well as actual improvements, material/supply purchases and personal property components (i.e. carpet, appliances, kitchen countertops etc). Backgrounder: I haven't done a cost segregation study, but all of the expenses have been carefully itemized to show expenses for the different categories so that it's easier to see what's depreciable. 

Also, the property was eventually put into service as a vacation rental with additional purchases made for personal property components that have a 5 yr depreciable life for the 100% bonus depreciation. And again, my CPA isn't depreciating this components. 

Where are we (either of us) wrong?

[Eamonn McElroy]

@Barry Pekin

@Basit Siddiqi

"Cost segregations" are not optional.  The IRC, regs, and case law are clear about this.  Cost must be apportioned or allocated among the various asset classes purchased.

Whether a tax professional decides to apply a "rule of thumb" allocation or refer his/her client to a firm that will perform a fully engineered cost seg is a matter of professional judgement, with one eye towards the IRM and case law precedence.

Calling a CPA "lazy" because he or she won't perform a cost seg is a little bit presumptuous and hints toward a lack of understanding regarding the profession...

We also need to be clear that what OP is describing does not require a cost seg.  She's describing a fully itemized rehab.  NO apportionment or allocation required.