Title: IRS Clarifies Capital Improvement vs Repair Expense? | Dermody, Burke & Brown
Headings: IRS Clarifies Capital Improvement vs Repair Expense?
IRS Clarifies Capital Improvement vs Repair Expense?
Content: Fixing a defect or design flaw
Creating an addition, physical enlargement or expansion
Creating an increase in capacity, productivity or efficiency
Rebuilding property after the end of its economic useful life
Replacing a major component or structural part of the property
Adapting property to a new or different use
The proposed regulations require capitalization of amounts paid to acquire, produce, or improve tangible real and personal property, including amounts paid to facilitate (closing costs) the acquisition of tangible property. Amounts paid to repair and main property and equipment are deductable if those amounts are not required to be capitalized under §1.263 (a)-3, which states in part that any amounts paid for permanent improvements or betterments made to increase the value of such property must be capitalized. Under the proposed regulations these improvement standards are applied to the building itself and individually to its structural components such as heating and ventilation, plumbing, electrical, fire protection and security systems and escalators and elevators. Also the new regulations will allow the dispositions of component parts of a building resulting in the recognition of a gain or loss upon the retirement of such component. The proposed regulation also provides a "safe harbor" for routine maintenance. It indicates that recurring activities (inspection, cleaning, testing, replacing parts, and so on) that are expected to be performed as a result of the use of property to keep the property in its ordinarily operating condition aren't capital improvements. The activity is considered routine if, at the time the property was placed in service, the taxpayer reasonably expected to perform the activity more than once during the property's life. The following table summarizes many of the factual considerations used by the courts. These factors, although not exhaustive, should be considered in your analysis to distinguish between capital expenditures and deductible repairs. Capital
Repair
Improvements that "put" property in a better operating condition
Improvements that "keep" property in efficient operating condition
Restores the property to a "like new" condition
Restores the property to its previous condition
Addition of new or replacement components or material sub-components to property
Protects the underlying property through routine maintenance
Addition of upgrades or modifications to property
Incidental Repair to property
Enhances the value of the property in the nature of a betterment

Extends the useful life of the property

Improves the efficiency of the property

Improves the quality of the property

Increases the strength of the property

Increases the capacity of the property

Ameliorates a material condition or defec

Adapts the property to a new use

Plan of Rehabilitation Doctrine

The new regulations also address amounts paid to acquire or produce tangible property under §1.263 (a)-2T, this section contains a de minimis rule.