Are they repairs or improvements? How to nail down current deductions

If your business completes minor repairs by Dec. 31, 2023, you can deduct those costs on your 2023 tax return. But different tax rules apply to improvements. As opposed to repairs, improvements are capital expenditures that must be written off over time.

How can you tell whether work constitutes repairs or improvements? It can be tricky. Fixing a broken windowpane is clearly a repair, while adding an indoor parking facility is obviously an improvement. But many expenses fall in between those two examples.

Safe harbors

Fortunately, IRS tangible property regulations offer more clarity. Notably, the final regulations provide a safe harbor rule. For federal tax purposes, you can currently deduct amounts paid for tangible property if the deductions are made financial accounting purposes or in keeping your books and records. However, a dollar limit applies:

  • $5,000 if you have an “applicable financial statement,” generally meaning one that’s audited by a CPA, or
  • $2,500 if you don’t have an applicable financial statement

Additional rules apply that may limit or eliminate your current deduction for a particular expense.

There’s also a small businesses safe harbor. Under this stipulation, businesses with $10 million or less in average gross receipts can elect to currently deduct improvements to a building with an unadjusted basis of $1 million or less. However, the total amount paid for repairs, maintenance and improvements to the building can’t exceed the lesser of $10,000 or 2% of the unadjusted basis.

Further IRS guidance

Routine maintenance costs generally are deductible in the year in which they’re incurred. An activity is “routine” if the business reasonably expects to perform it more than once during the property’s useful life (more than once over a 10-year period for buildings). Note that a business may capitalize these costs if this is consistent with its financial statements.

In addition, the traditional rule that improvements are capitalized and depreciated over time remains in place. But the regulations authorize a business to deduct some improvements (for example, an HVAC unit) if they are properly segregated.

A potential tax trap

If your business makes repairs and improvements at the same time, be aware that the IRS may lump the costs together as a general plan of betterment, causing you to forfeit a current deduction for repairs. All else being equal, arrange repair work separately at another time — preferably before 2024 if you want to reduce your 2023 tax liability.

As 2023 winds down, it could pay to look for possible repairs you can deduct on your return. You should also seek the advice of a seasoned tax CPA to differentiate between repairs and improvements. Doing so can help you get more out of your return and avoid penalties for misclassification of the work.


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