Repair expenses vs. capitalized costs in landlord and developer accounting
One of the most difficult items in handling accounting work for property landlords and developers is the consistent problem of what is a repair, and what is a capital improvement.
From the standpoint of the landlord or developer, the problem with capital improvements is that they need to be depreciated. The problem with depreciation is the lack of deductions in the year where the expenses have occurred. Let’s use an example. You build out a retail space in a commercial property at a cost of $30,000. Again, this is an example, so let’s assume that it qualifies for fifteen year depreciation, and that it was placed in service on the 1st day of the taxable year in question. What does all of this mean. Well, the building owner just spent $30,000 and only gets a deduction of $2,000 in the first year. This can create a bunch of income and income tax. In many instances, if it isn’t deductible, it naturally becomes income.
This situation can become very complicated, very quickly, even with the most rudimentary of transactions. Let’s say that you have a leaky faucet in one of your units. We’ve all have at least one. If it can be fixed its a repair and completely deductible. If it has to be replaced its a capital improvement. But what if the new faucet only cost you nineteen dollars at your local hardware store, and you put it in yourself. Are we really expected to depreciate a nineteen dollar item over a useful life of seven years?
The answers to these questions really come down to years of experience and professionalism. Don’t try to do this yourself. As highly qualified and recommended CPA’s and EA’s in the Chicagoland Area, we have developed reasonable answers to these questions which have helped our clients through audits. Chris Amundson, President of Accounting Solutions, also owns over 50,000 square feet of commercial property on the Northside. We have the experience necessary to handle your accounting needs. The Special Accounting Packages section of this page may have what you need. Whether you have a new business, an audit, need returns filed, or just a second opinion, we can help. Call or e-mail Chris today.