Repair or Improvement: Which is it?

Repair or Improvement Image

You can claim a tax deduction for minor repairs made by your business by December 31st, 2023, on your tax return, but improvements are subject to separate tax laws. Improvements, as opposed to repairs, are capital expenses that need to be deducted gradually. How can you determine if the project is an improvement or a repair? It may be difficult. There’s no denying that installing an indoor parking facility is an upgrade over simply fixing a broken windowpane. However, a lot of costs lie in between those two ranges. The IRS provides more information under the tangible property regulations.

Safe Harbors

The final regulations include a safe-harbor rule that allows you to write off amounts paid for tangible property for federal tax purposes as long as you also deduct those costs for financial accounting purposes or in maintaining your books and records. There is a dollar cap, though:

  • $5,000 if you have an “applicable financial statement,” which is often defined as one that has been audited by a CPA; otherwise
  • $2,500 in the event that you lack an applicable financial statement.

There are more regulations that could restrict or entirely eliminate your current deduction for a certain item.

Additionally, under a safe harbor for small businesses, companies with average gross receipts of no more than $10 million may choose to deduct improvements made to a building with an unadjusted basis of $1 million or less. However, the entire amount spent on building upkeep, repairs, and renovations cannot be more than $10,000 or 2% of the unadjusted basis, whichever is lower.

Additional IRS Guidance

In most cases, the expense of routine maintenance is deductible in the year it is incurred. If you reasonably anticipate performing an action more than once over the useful life of the property—or more than once over a ten-year period for buildings—it is considered “routine.” Note: A business may capitalize these costs if this is consistent with its financial statements.

In addition, the traditional rule that improvements are capitalized and depreciated over time remains in place. But if an improvement is appropriately segregated, the regulations allow a business to deduct some improvements (such as an HVAC system).

Possible tax pitfalls

You may lose the current deduction for repairs if your company makes both upgrades and repairs at the same time. This is because the IRS may classify the costs as part of a general plan of betterment. If all else is equal, schedule the repair work separately for a later date, ideally before 2024, to lower your 2023 tax liability. Contact us if you have questions about repairs or improvements as part of your tax planning strategy. And be sure to check out our new tax planning guide for 2023-2024.

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