The difference between something that can be expensed as repairs and maintenance versus capitalized as improvements can sometimes be a very complex issue.
If you were to replace an air conditioning unit in one out of twenty apartments that are all in the same building could this be considered a repair? You might be surprised to find out that depending on the situation the answer may be yes. Although there is no standard quantitative answer the Internal Revenue Service (IRS) believes the taxpayer should be able to use their best judgment.
The only definite quantitative factor can be found in a de minimis safe harbor election. Without applicable financial statements the de minimis safe harbor election allows you to expense amounts up to $2,500 per invoice or item purchased. With applicable financial statements the de minimis safe harbor election allows you to expense amounts up to $5,000 per invoice or item purchased. Previously there may have been items such as windows purchased for a total of $10,000 that typically would have been capitalized.
With the current repair regulations, if the balance sheet contains new windows purchased for $10,000 you may want to ask how many windows were actually purchased. If there were 5 windows purchased for $2,000 each then even without applicable financial statements the de minimis safe harbor election allows all 5 windows to be expensed in the current year.
The goal of the repair regulations is to make the line between repairs and capitalized improvements less blurry. Characterizing the building into the different systems described in the repair regulations can also be helpful. The key building systems are the plumbing system, electrical system, HVAC system, elevator system, escalator system, fire protection and alarm system, gas distribution system, and the security system. This allows any new improvements made to the building to be grouped together based on each of the systems.
For more information regarding repair regulations, please contact your LSL Advisor at 714.569.1000 or [email protected].
Written by: Lindsey Bocksberger, Tax Senior