Capitalization of Repairs and Maintenance - Unit of Property Explained
In the way of background, regulations effective in 2014 and the temporary regulations effective since 2012, set forth the capitalization versus expensing scheme using a unit of measure described in the regulations as a "unit of property".
In general, certain improvements limited to 30% of a "unit of property" may be deductible. A building, including a dwelling, (with the exception of separate components like HVAC, electrical, plumbing, fire and security systems) is considered to be a "unit of property." Thus, when considering something like repairs to the roof of a building (i.e. "unit of property",) the replacement of shingles with a similar type constitutes less than 30% of the total "unit of property," and thus would be considered to be an expensible repair.
The regulations also consider interdependence of unit of properties, wherein for example, all the cabins together might be considered to be one unit of property. This could allow for example a cottage colony type of business to make substantial repairs to five cabins in one year which comprise less than 30% of the total defined unit of property, allowing the amount to be expensed as repairs in the year paid. By contract, capitalized and depreciated over 27 or more years which results in substantial overstatement of taxable income to partners.
Cash Flow Tax Trap
The misclassification of repairs as capital items, unless financed, results in amounts paid from current operating income after it is taxed, a very expensive proposition.
By contacting us before every major improvement undertaking, it is very possible to conduct improvements in such a manner to fall within the regulatory exceptions for capitalization.
If you have any questions, do not hesitate to contact the professionals at Dana S. Beane & Company, P.C.
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