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Businesses and rental property owners who buy fixed assets or spend money to maintain or improve their property often ask this question.

New final IRS regulations aim to clear up the confusion. Here are a few highlights.

Safe harbor. Taxpayers may elect to deduct relatively small purchases, such as appliances for an apartment building. If the taxpayer has an applicable financial statement,* purchases of up to $5,000 per invoice (or per item as substantiated on an itemized invoice) may be deducted. A taxpayer that lacks the applicable financial statement may deduct up to $500 per invoice (or per item). Either way, the taxpayer must have and follow written accounting procedures that require expensing the items for book purposes.

Improvements. Expenditures related to preexisting units of property are generally considered paid for capital improvements — and depreciated over time — if the expenditures are for:

  • Betterments
  • Restorations
  • Adaptations

The regulations provide details.

Another election. Instead of deducting repair and maintenance costs, taxpayers may elect to capitalize the costs and depreciate them as improvements. The amounts would have to be treated as capital expenditures for book purposes.

For more information on these issues, contact us.

* Includes statements required to be filed with the SEC, certain audited financial statements, and statements required to be provided to federal or state governments or agencies (other than the SEC or IRS)

Original content provided by: Client Line Newsletter