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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, PLLC
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