If your business completes minor repairs by December 31, you can deduct those costs on your 2023 tax return. But different tax rules apply to improvements. Improvements are capital expenditures that must be written off over time unlike repairs.
Even if you are required to capitalize certain items, there may be an opportunity to claim a loss for the adjusted basis of the item replaced, as well as favorable bonus depreciation and expensing in certain circumstances. Business owners have plenty of options, but knowing the rules is extremely important.
Safe harbors
How can you tell whether work constitutes a repair or an improvement? It can be tricky. Fixing a broken windowpane is clearly a repair, while adding an indoor parking facility is obviously an improvement. But many expenses fall in a gray area. Fortunately, IRS tangible property regulations offer more clarity.
The final regulations provide a safe-harbor rule under which you can currently deduct amounts paid for tangible property for federal tax purposes if you deduct those amounts for financial accounting purposes or in keeping your books and records.
However, a dollar limit applies:
- $5,000 if you have an “applicable financial statement,” generally meaning one that’s audited by a CPA
- $2,500 if you don’t have an applicable financial statement.
Additional rules apply that may limit or eliminate your current deduction for a particular expense.
There’s also a small business safe harbor under which businesses with $10 million or less in average gross receipts can elect to currently deduct improvements to a building with an unadjusted basis of $1 million or less. However, the total amount paid for repairs, maintenance, and improvements to the building can’t exceed the lesser of $10,000 or 2 percent of the unadjusted basis.
Further IRS guidance
Routine maintenance costs generally are deductible in the year in which they’re incurred. An activity is “routine” if the business reasonably expects to perform it more than once during the property’s useful life (more than once over a 10-year period for buildings). Note: A business may capitalize these costs if this is consistent with its financial statements.
In addition, the traditional rule that improvements are capitalized and depreciated over time remains in place. However, the regulations authorize a business to deduct some improvements (for example, an HVAC unit) if they are properly segregated.
A potential tax trap
If your business makes repairs and improvements at the same time, be aware that the IRS may lump the costs together as a general plan of betterment, causing you to forfeit a current deduction for repairs. All else being equal, arrange repair work at a separate time — preferably before 2024 if you want to reduce your 2023 tax liability.
Start planning now
As the upcoming filing season approaches, it is important to seek advice from a trusted tax professional to minimize your tax liability and maximize tax savings. Our 2023-2024 Tax Planning Guide can help you get a head start. If you need further assistance, fill out the form on this page to connect with a member of our national tax practice.
For more year-end tax planning ideas, view our tax planning guide.
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