More specifically, the new IRS rules made significant changes in the way companies deducted repairs and asset dispositions by setting more defined guidelines for what assets a business can expense and what assets can be capitalized.
The determining factor of what defines a repair expense versus a capitalized improvement cost now lies in a case-by-case analysis of the scenario requiring the expenditure, rather than a review of the overall costs incurred. In most cases, the tax benefits resulting from expensing versus capitalizing are significant. The difference means a company is able to take an immediate deduction of the full remaining asset basis versus an incremental deduction spread out over many years.
According to the new regulations, any expenditure resulting in the “betterment” of the facility must be capitalized. That means any costs simply relating to keeping the property in an ordinary operating condition or restoring it to the same condition when it was placed in service can be expensed.
Any time the expenditure creates a material increase in strength, capacity, productivity, efficiency, quality or output, those costs should be capitalized as a “betterment.” Some examples of repairs that may potentially qualify as an immediate expense would be roof membrane replacements, new HVAC system components and a “refresh” office remodeling where only the finishes are replaced.