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On a commercial building, can the general contractor percentage be expenses separately?

Level 2

Client has done a large renovation on a building.  Some expenses which are repairs and some are improvements.  The General Contractor billed him by itemizing everything out.  Specifically, the GC put what they paid subs for each different item on the property (some are repairs, some are improvements), what they paid staff of the GC to manage the project, and an item for 10% profit.  

 

Can each of these things be expensed separately?  So then we would only depreciate amounts given to subs for improvements.  We would lump the GC 10% profit as a professional fee, the charge for staff as an other business expense, and the subs that were paid for the repairs would also be expensed. 

 

Thanks!

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9 Replies 9
Level 11
Level 11

You should put all cost for renovation (labor, material, any charges the GC charged)  as your basis, and depreciate over 39 years. Repairs will be put under repairs, I would just put one amount for repairs, as your client has docs. Don't think the 10% is a professional fee, but should be part of basis for improvements

Level 2

Some of the renovation were repairs, some were improvements.  It would be in the TP better interest to show more repairs.  The contractor itemized out what was repairs and it is obvious to gather what is improvements.  Since it was  a big remodel, adding the profit margin as a expense is also beneficial. 

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Level 11
Level 11

Professional tax preparers prepare taxes according to IRS regulations, not what would be better for tax payer.  

Level 2

I agree---but a repair is a repair, right?

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Level 15

A repair is a repair, but with the rules that we are dealing with these days those aren't as clear cut as they used to be.

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
Level 13

A repair is Not a repair when it is part of an improvement project, unless it has nothing to do with what is being improved.

 Example: While building walls, new flooring, etc, the plumber also Fixes an existing drain that was always slow. That is part of the improvement.

And you pointed out it is a Large Amount of repairs, which really starts to put it in the realm of Improvement.

Read the IRS regulations for how something is restored to working condition, extended its useful life, etc.

 

And labor factors into the material for what was done. It isn't Separated. That plumber might be labor only without any new fixtures, but this is a Project Expenditure at that point.

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Level 11

I would allocate the 10% profit to each of the other items.  I agree with qbteachmt though that these would really have to be *completely* unrelated repairs.  Maybe if the contractor added 12 more retail units to the east wing of the building for $2M and also unclogged the toilet in west wing unit 3B for $100.  Then the toilet would be a repair.  With the 10% markup that's $110.

Level 13

This discussion is a typical "Time & Expense + markup" for how the Contractor is charging. Not for how the Customer is tracking and incurring whatever is being done and paid for.

I think all of this is wrong:

"We would lump the GC 10% profit as a professional fee,"

You would not even do this when you hire an Independent Construction Manager, because this is project related.

"the charge for staff as an other business expense,"

Nope.

"and the subs that were paid for the repairs would also be expensed."

Really, you seem to be trying to manipulate something that is clearly described in the IRS regulations, which you don't seem to have investigated.

Here is what I teach: Replacing a broken window is a repair. Replacing them all with high efficiency windows is Improvement, as asset basis. So, replacing one broken window while also replacing a bunch of others for whatever reason at all is all Improvement. "Fixing" something discovered as part of a larger project means it just became part of the project. Your Client knows this as contingency.

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"Level Up" is a gaming function, not a real life function.
Level 11

Capitalize the improvements.  Deduct the repairs.  Allocate the GC fees and markup between them, pro-rated according to amount unless you have a better (documented) method.  I really don't see what the fuss is about.  Others can assume your client is a crook, so I'll assume that he figured "as long as the building is vacant we'll do some deferred maintenance."