Understanding Repair and Maintenance Deductions
Repairs and maintenance expenses can often be tax deductible for businesses, but the rules surrounding these deductions can be complex. Generally, taxpayers are allowed to deduct the cost of incidental repairs and maintenance for property used in carrying on a trade or business under Internal Revenue Code (IRC) § 162.
However, it’s crucial to understand the distinction between deductible repairs and capital improvements, as the tax treatment differs significantly.
Deductible Repairs vs. Capital Improvements
Deductible repairs are typically minor, routine expenses that keep property in ordinary operating condition. These costs can be immediately expensed. On the other hand, capital improvements that add value, prolong the useful life, or adapt property to new uses must be capitalized and depreciated over time.
Examples of potentially deductible repairs include:
• Fixing a broken window
• Repainting a room
• Replacing a faulty part in machinery
Capital improvements that must be capitalized might include:
• Adding a new wing to a building
• Replacing an entire roof
• Upgrading to more efficient equipment
The Tangible Property Regulations
In 2014, the IRS introduced the tangible property regulations, which provide guidance on distinguishing between repairs and improvements. These regulations allow taxpayers to deduct amounts paid for repairs and maintenance to tangible property if the amounts are not otherwise required to be capitalized.
The regulations also offer safe harbors and elections that can simplify the treatment of certain expenses for small businesses.
Documentation and Record-Keeping
To support repair and maintenance deductions, businesses should maintain detailed records, including:
• Invoices and receipts
• Description of work performed
• Purpose of the repair
• Date of the repair
• Cost of materials and labor
Proper documentation is crucial in case of an IRS audit, as the burden of proof rests with the taxpayer to show that an expense qualifies as a deductible repair.
The De Minimis Safe Harbor Election
Small businesses can benefit from the de minimis safe harbor election, which allows them to immediately deduct certain low-cost items, even if they would otherwise need to be capitalized. For businesses with applicable financial statements, the threshold is $5,000 per item or invoice. For those without such statements, the threshold is $2,500.
This election can simplify accounting for many routine repair and maintenance costs.
Seeking Professional Guidance
Given the complexity of tax regulations surrounding repairs and maintenance, it’s advisable for business owners to consult with a qualified tax professional. They can help ensure proper classification of expenses and maximize allowable deductions while maintaining compliance with IRS rules.