Business Property Expenditures

Many businesses continually make expenditures to improve and maintain business property. However, it is not always clear whether the amount incurred to repair or refurbish that business property is a capital expense or an incidental repair. Proper classification is critical because, for federal tax purposes, capital expenditures (see below) must be added to the property’s tax basis and recovered (expensed) through depreciation over a period of years. If the property is not subject to depreciation, capitalized costs are only recovered when the property is sold. Incidental repairs are not considered capital expenditures and can be deducted as incurred, providing a more immediate tax benefit.

Capital expenditures include (1) costs of permanent improvements or betterments to increase the value of the property or (2) amounts expended in restoring property. In addition, capital expenditures include amounts paid or incurred to add value to or prolong the useful life of property or adapt property to a new or different use. Capital expenditures also include the cost of title defense or perfection, architects’ fees, and purchase commissions.

Incidental repairs are deductible currently as ordinary and necessary business expenses. These costs do not materially add to the value of property or appreciably prolong its life. Rather, they keep the property in an ordinarily efficient operating condition.

Costs of acquiring property generally are capitalized as part of the property’s basis. However, expenses for repairs immediately after the property is acquired might be either capitalized or deducted. These repairs can be deducted if the expense would ordinarily qualify for deduction as a repair. If, however, the repairs are required as a condition of the purchase, their cost is capitalized.

It is often difficult to determine the proper classification for capital and repair expenditures. So, please contact us concerning capital expenditure classification matters or any other tax compliance or planning issue.