Reclassifying Repair & Maintenance Expenses

Part 7 of Jim Sacher’s 12 Great Ideas for Tax Savings series

What to Look For

Does your business own real estate or other fixed assets?  Do you perform regular maintenance and repairs to those assets?  If so, you may be able to recapture thousands of dollars by reclassifying improperly classified capital expenses as deductible costs to accelerate write-offs.  Have you made improvements to a building due to tenant requirements or remodels this year or in a prior year?  If so, you may be able to accelerate deductions on the basis of the replaced property, and do it in 2014.

The Opportunity

Last year, the IRS issued long-awaited guidance that was intended to clarify the appropriate tax treatment for items surrounding capitalization of fixed assets. In many instances, prior guidance was unclear with regard to when certain expenditures, such as repairs and maintenance (R&M), were required to be capitalized versus expensed.

For example, if you replace the roof on a building you own, does that repair extend the useful life of the building or merely avoid shortening it?  How do you know whether the cost must be capitalized as an improvement or expensed as R&M?  The new regulations clarify when an expenditure is a repair and currently expensed versus capitalized.

The Benefit

Effective for tax years beginning on or after Jan. 1, 2014, new IRS guidance provides the opportunity for tax elections to be made that would adopt certain accounting methods, allowing taxpayers to expense items that may have otherwise have been treated as capital expenditures.   Moreover, taxpayers may, with the proper elections, treat previously capitalized repairs as current expense and expense old components of a building that had been subsequently replaced.  There are a variety of accounting methods that can be changed that in the right circumstances could produce immediate benefits.  However, many of these changes are automatic for 2014 only, so analysis and decisions must be made before the filing of the 2014 tax returns.

Even for taxpayers who may not immediately benefit from the new rules, opportunities exist to make accounting method changes for future needs.  The defensive elections can be a small investment in time that produces sizable benefits in the future.

Stay tuned for the next article in our series on ERISA reviews. If you have questions about R&M Capitalization or how you can take advantage of any of these tax savings ideas, please contact James Sacher, Partner, Tax & Business Services.