Repair vs. Capitalization Review

There have been several recent developments and court cases that provide significant opportunities for taxpayers to expense certain costs that have traditionally been capitalized. The current IRS proposed regulations have broadened and clarified the definition of “repair and maintenance” costs. Application of the existing law requires an in-depth understanding of the various tax cases and “tests” that must be met. Thorough documentation is necessary to sustain audit and must show the application of existing law for each asset reclassified.

Currently, this opportunity relates to all prior, current, and future tax years. However, in order to take advantage of the tax laws for prior years, taxpayers should act quickly as the IRS is considering rules that would limit the opportunity for prior years.

Opportunity for taxpayers using the Book Method

Taxpayers utilizing the “book” method of accounting — with respect to R&M — should consider the potential to accelerate cash flow by 1) changing their method of accounting and 2) engaging in an R&M study. By using the book method, taxpayers miss out on the opportunity to accelerate cash flow through the current-year deduction for R&M expense.

It is important to note that under Rev. Proc. 2009-39, the change in accounting method of reclassifying previously capitalized repair and maintenance expenses as deductions is now considered automatic. In order to implement the automatic method, a section 481(a) adjustment is needed, along with specific representations in an attachment to Form 3115. This change in accounting method can be filed any time before the extended tax return due date in the year of change.

Who makes a good Repair & Maintenance Tax Review candidate?

While many can take advantage of deductions through a Repair & Maintenance Study, there are specific industries that stand to benefit the most, such as operations that maintain property on a frequent basis. Retail industry taxpayers are a prime example, as they tend to have similar maintenance costs at each location every year. These might include roof and HVAC replacements or paving work that has been capitalized as “building” using a long tax life. This kind of activity creates a great opportunity for deductions. Due to the size or nature of their operations other industries that are good candidates include hotels, restaurants, supermarkets, manufacturing facilities / factories, and banks among others.

Get Started Today

KBKG’s Repair vs. Capitalization Studies analyze all capital expenditures incurred on a company’s ledger, examining if overcapitalization has occurred and where the costs can be treated as a current-year deduction or otherwise. We deliver a comprehensive report that includes all required documentation, per IRS guidelines. KBKG’s thorough analysis ensures that all assets are accurately classified in order to optimize tax savings.

To get started today, contact Gian Pazzia at 877.525.4462 x150 or gian@kbkg.com