Tax Tip of the Week
Repair or Improvement?
Generally speaking, any asset purchased by a business that is expected to last more than one year must be depreciated over the useful life of that asset.
Under current law, the maximum Section 179 deduction (first year expensing) is $139,000, down from $500,000 in 2011. In addition, the 100% “Bonus” depreciation (Section 168) rules allowing a write-off of the entire cost of qualifying assets is limited to 50% this year compared to a 100% optional election in 2011.
While those rules may be familiar, you need to be aware of the revised “repair regulations." These temporary regulations give us some guidance on what assets need to be capitalized and depreciated instead of expensing in the current year.
Say, for example, that you replace the roof on your commercial office building. In prior years, you may have decided the expense was a repair because only a small portion of your building was involved. Under the new regulations, roof replacement is an improvement. That means you depreciate the cost over the life of the building (39.5 years) instead of expensing it immediately.
A more detailed explanation of the new “repair regulations” goes beyond the scope of this newsletter. The key highlights, however, include:
- Unit of property is segregated to “component systems” for buildings.
- Reduced scope of what qualifies under case law and redacted 2008 proposed regulations.
- Provides rules for “component system” disposal losses.
- Clarifies the de minimis rules.
- New procedures to make accounting changes to correct prior depreciation elections have been simplified (Form 3115).
Deciding which depreciation method, and options to make, should be an important part of your tax planning to maximize profits. We will be right here to help you make those decisions—just give us a call.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt - the guy behind TTW
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