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Capitalize repair and maintenance costs under 1.263(a) - add to depreciation schedule or just expense?

pat
Level 4

I need to elect to capitalize repair and maintenance costs under 1.263(a). I found the election option but am uncertain as to whether I add the amounts to be capitalized to the return as a line item expense or to the depreciation schedule as separate assets. These were asphalt and sidewalk repairs for about $50k and Building Repairs/Maint for about $13k. Do they qualify for Bonus Depreciation?

How would you handle it?

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8 Replies 8
TaxGuyBill
Level 15

Can you clarify what you are trying to do?

Normally, "repairs" and "maintenance" are fully deductible in the year it was paid.

The election to CAPITALIZE those means you do NOT want to deduct the cost in one year, that you want to add it to the Basis (and presumable depreciate it over many years).

On the other hand, if those things were not "repairs" or "maintenance", they would be depreciable assets and you don't need that election because you are already depreciating it.

pat
Level 4

That is what I find confusing about this. "A taxpayer my elect to capitalize and depreciate as an improvement, repair and maintenance costs as long as the taxpayer incurs the amounts as capital expenditures for financial accounting purposes. This election applies to all amount paid for repair and maintenance  treated as capital expenditures on a taxpayer's books or records for the taxable year." 

Since these expenses were so large I thought taking the election would be better than expensing. If I add as an improvement to depreciation schedule I can use Bonus Depreciation to write them off completely. I assume this treatment allows me to add them to basis but have not read that explicitly.

Thoughts?

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TaxGuyBill
Level 15

First, confirm that it actually is a repair or maintenance, rather than a depreciable improvement.

Second, is it being treated as a capital expenses for their 'books'?  If not, it seems like it wouldn't qualify for the election.

 

If it is a repair, you are mentioning Bonus depreciation.  IF it were to qualify for Bonus (which might not be the case to the repairs to the building; that may need to be depreciated over 27.5/39 years), you would be taking the full deduction in the current year.  So for income tax purposes, why would you bother to make this election?  Yes, treating it as a capital expense would add to Basis, but then taking Bonus would just bring the Basis right back down again.  Net result would be a $0 change in Basis.

The Basis thing MIGHT POSSIBLY be factored in for QBI purposes.  But that would only be the case if (1) the rental qualifies for QBI, (2) the Basis is even a factor for the client's QBI calculation (it might not affect the calculation) AND (3) if that does affect the "Unadjusted Basis" for purposes of QBI (I would need to look up the details if an improvement would be added to "Unadjusted Basis").

pat
Level 4

Thank you.

I do find this a tad circular.

I did confirm that these are repair and maintenance items. 

However, the election allows the repair to be treated as an improvement. I read that as 15 year rather than 39 year property even if to the building. Am I wrong?

What is the benefit of this election? Do you think the total amount reported as expenses should be a consideration?

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TaxGuyBill
Level 15

The sidewalks and asphalt would probably be a 15 year land improvement.  My first thought for the building is "no, it still would be 39 years", but I would need to check if there are any special rules involved in connection with that election.

For the most part, this election is for people that DON'T want the full deduction in the current year (which is rather unusual).  But you seem to want to take the full deduction, so why are you wanting to make this election?

And as I mentioned before, it is POSSIBLE it might affect the QBI calculation (I would need to check on the rules for "unadjusted Basis")

pat
Level 4

I see your point. 

You think it is ok to expense, regardless of the amount? It is the large expenditures that are urging me to take the election.

 

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TaxGuyBill
Level 15

Yes.  If you have determined that it truly is a "repair" or "maintenance" (versus a depreciable capital improvement), then you can deduct it regardless of the amount.

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pat
Level 4

Thank you for this. I will look at the QBI impact and let you know if I find anything of interest to this discussion.

 

Good talk!!

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