Deductible Repairs vs. Capital Expenditures

[Julio Gonzalez]

A capital expenditure is money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment. This would include architectural fees, new equipment, cost of protecting or defending your title to the property, or building improvements. A capital expenditure typically either increases the value of an existing asset or adds an entirely new asset. To determine if the expense should be classified as a capital improvement or a deductible repair, the context of the expense is very important.

An example is, if an item of expenditure is part of a general plan of modernization, renovation or rehabilitation to equipment or other business property, it typically must be capitalized even though on its own it would be currently deductible.

According to IRS Code, expenses that you must capitalize are those that:

• Materially increase value
• Substantially prolong useful life (including replacement of deteriorating assets)
• Adapt the property to a new or different use

However, you are allowed to deduct expenses and fees for routine maintenance and repairs that help keep the property in efficient operating condition. You can deduct the cost of labor and parts to maintain or repair your business assets, as long as the expense doesn’t prolong the useful life of the asset or increase the value of the asset.

Tangible Property Repair Expenses That Are Deductible:

• Replacement of Lighting
• Roof repairs
• Resurfaced external or interior floors
• Resurfaced parking lots
• Interior or exterior painting
• Replacement of doors and windows

• Rekey locks

[Julio Gonzalez]

@John Underwood

The de minimis safe harbor election has you expense amounts up to $2500 per invoice or per item. That doesn't mean that all items under $2500 must be expensed, but instead should be evaluated using the purpose of the item. Here's a link that explains the answers to a lot of questions around tangible property. Being an REP shouldn't have an impact on the classification between expense or capitalized expenditure. REP would come into play if you have losses - expensing items creates a larger net loss and REPs losses aren't capped at passive activity income.