Title: Capital Improvements vs repairs. What's the difference?
Headings: Capital Improvements vs repairs. What’s the difference?
Capital Improvements vs repairs. What’s the difference?
Construction’s impact on your property’s functionality is the key
What are the definitions?
What’s the difference in the IRS’s eyes?
What goes into a Capital Improvement Plan?
Benefits of a CIP
Features of a CIP
Capital improvement examples
A capital improvement plans example
How can we help?

Content: “There has been much debate and controversy not to mention a number of court cases regarding whether, or to what extent, the amounts paid to restore or improve property are capital expenditures or deductible ordinary and necessary repair and maintenance expenses.” The IRS has now defined what is capital as opposed to what would be considered a repair and routine maintenance. Property capital improvements include: 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 useful economic life
Replacing a major component or structural part of the property
Adapting property to a new or different use
Under the IRS regulations, capital improvements can be applied to buildings themselves and individually to structural components. These include “heating and ventilation, plumbing, electrical, fire protection and security systems and escalators and elevators.” 1
IRS regulation 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.” 1
Dermody, Burke & Brown, CPAs have provided this helpful chart. Capital
Repair
Improvements that “put” property into 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 defect

Adapts the property to a new use

Plan of Rehabilitation Doctrine

What goes into a Capital Improvement Plan? As mentioned above a CIP identifies capital projects and equipment purchases, provides a planning schedule, and identifies options for financing the plan.