New business repair regulations: When is a repair actually a repair?

Now that tax season is months behind us, it’s time to catch up with all the new topics that will affect us over the course of this year and beyond. One of the areas we need to put more emphasis on is whether money spent should be classified as a true repair or as a capitalized fixed asset.

Last September, the IRS issued final regulations on an issue that we are frequently asked about: Is an expenditure on a repair to be immediately expensed or should it be capitalized as a fixed asset and depreciated?

These regulations spell out when an item is to be deemed materials and supplies and will force businesses to ask whether the item is a unit of property that has a useful life of 12 months or less and/or has a cost of $200 or less.

There are also some de minimis rules that help to spell out the tax treatment of items purchased. If your accountant performs an audit of your financial statements, he or she most likely has already discussed these policies with you. But check the audit footnotes to be sure your handling of repair costs is consistent with the rules on capitalization and their related allowable elections.

It is very important to have a written capitalization policy in place prior to the beginning of the tax year so that these rules can be applied consistently following the new guidelines. Realize that you may also need to spell out your treatment of certain expenses on next year’s tax return by filing certain election statements with the return, in order to get the treatment you desire.



Within this regulation, there is clarification on when a cost is actually an item that should be capitalized as a fixed asset. They have spelled out a betterment test and require that we look at whether the cost adapts the unit of property to a new or different use, rebuilds the property to a like-new state after the end of its life, or replaces parts/combinations of parts that comprise a major component.

This topic is too complicated to be fully explored in a blog post, but you really should be aware that there are some major regulations that have now been finalized in this area, and it is important to have written documentation of your company’s policies. Be sure to address this issue with your tax professional/accountant and review how you are handling such expenses in your financial records.

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