Can I claim deductions for repair and maintenance costs from prior years?

For any repair and maintenance costs being depreciated as a fixed asset, you may claim a deduction on a current tax return for the remaining tax basis of the asset without the need for amended returns.

How do tangible property regulations treat expenditure events?

In general, you must capitalize an expenditure event as an asset if it results in an improvement to existing tangible property. An improvement occurs when a betterment, restoration, or change-in-use (adaptation) occurs to existing property. Expenditure events that are not an improvement can generally be expensed as a repair.

When is an expenditure event a deductible repair?

You can generally deduct as a repair and maintenance cost expenditures for events that don’t result in an improvement. Examples of repairs include: Nonmaterial replacements of a building structure or building system component Minor additions or enhancements to a building structure or building system component Routine maintenance and upkeep

When is an expenditure event a capitalized improvement?

The regulations require you to capitalize as an improvement events that result in significant replacement of components, or material enhancements to components, of the building, or to the structure. Examples of a capitalized improvement could include the replacement of steel pipes to copper, or old windows with metal frames to energy-efficient models.

What steps can your organization take to address overcapitalization?

Accounting for capital improvements, repairs, and maintenance may seem like a daunting task. However, you can take the following steps to enhance current methods for repairs and clean up prior years: Develop a formal capitalization policy, for book and tax purposes Consult a cost segregation professional, to leverage building and industry-specific experience to craft procedures and policies for capturing more deductible repairs Cost segregation and fixed asset analyses, to review capital assets and underlying detail from prior periods Review prior tax records for building, leasehold improvement, and general improvement accounts

Does your industry expose you to risk of overcapitalization?

Most industries face overcapitalization issues, especially if they involve real estate assets and numerous capital project activities. Below you can see examples of industry-specific capital projects classified as repairs.

What is a fixed asset tax analysis?

A fixed asset analysis identifies opportunities to apply fixed asset changes that can provide immediate tax savings through accelerated tax methods for depreciation, repair, and maintenance expenses. Changes can apply to assets you placed in service in prior periods without amending tax returns. Following an asset analysis and corresponding accounting method change filings, your business can report adjustments to catch up on missed depreciation and repair expenses on current tax returns, lowering your current tax liability. Learn more about fixed asset tax analysis services here.

What information will you collect during a fixed asset tax analysis?

Tax depreciation schedules are the starting point of an analysis. You should also make available: Any available fixed asset accounting ledgers supporting the asset values for buildings, capital project assets, and leasehold improvements. Staff familiar with the scope, purpose, and history of the real estate assets, capital project activity, and maintenance plans. A tax professional will reconcile and review any available ledger detail and interview available staff to understand the scope, purpose, and intent of capital project and repair activities to apply the framework guidance for identifying deductible repairs and capital improvement assets from the asset costs.

Why is it important to work with a tax professional to address overcapitalization?

Tax and cost segregation professionals have enhanced understandings of buildings components as well as industry specific capital project trends. You can leverage this knowledge to craft accounting methods, policies, and procedures, and capture expenditures correctly for repair and capital asset treatment. Several changes to tax depreciation since 2018 mean you can assess other asset classification and method issues to accelerate depreciation and lower current income tax liabilities. Further, they can assist in filing the proper accounting method change filings to report repair and depreciation changes prior tax years identified, without the complications of amending prior period returns.

Article

Increase cash flow with tax methods for repair and maintenance costs

Dec. 1, 2021 · Authored by Jason Thompson, Jarrid McAuliff

You can likely gain significant tax savings by revisiting accounting methods for repair and maintenance costs, especially for taxpayers that own, invest in, and operate real estate.

Although the Tangible Property Regulations (TPR), effective since 2014, provide guidance on capital improvements and repairs, many taxpayers find they have so-called over-capitalization issues, in which tax-deductible repair and maintenance expenses are capitalized as fixed assets and depreciated as 27.5 or 39 year property.

What are tangible property regulations?

The TPR provide guidance on the tax treatment of costs paid to acquire, produce, improve, or repair tangible property.

The TPR also provide simplified safe-harbors for expensing certain costs.

Why do TPR challenges exist?

Many tax and accounting professionals struggle with the framework guidance in the TPR for classifying costs as tax-deductible repairs or capital improvements requiring depreciation.

Their quantitative and qualitative tests require professionals to understand and identify specific components of an asset, and how a capital project impacted such asset.

Let’s consider an HVAC project. Aside from its cost, an accounting professional must also consider the intent and purpose, and whether it resulted in a material upgrade, addition, or restoration of specific components or the system overall.

Many accountants find the requirement to identify and understand specific building components challenging, and they often miss tax-deductible repairs as a result.

Additionally, accounting methods for financial reporting purposes sometimes differ from tax methods. You may capitalize some items for which GAAP requires capitalization without further consideration for tax expensing.

How do you identify capitalized repairs?

An analysis of fixed asset records can help identify repair and maintenance expenses capitalized in prior years. Items capitalized in building, leasehold improvement, and capital project accounts are most exposed to capitalized repair issues.

Jason Thompson

Principal

Jarrid McAuliff

Managing Director

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.