Capitalize vs Expense

[Terry53029]

Hi all, am taking a CE course which is covering basis, deprecation, etc.  It is saying something I have never done, as far as rules to capitalize improvements, it is saying that small tax payers (annual gross income under $10 million, building under $1 million) do not have to capitalize at all. I have never considered income or value of building. I have always tried to follow the rules for all my clients (all but a few are small tp). Was just wondering if you guys/gals follow that advice.

[sjrcpa]

"do not have to capitalize at all." is a bit of a stretch. OK, a lot of a stretch.

Since the kinder, gentler IRS issued regulations in this area, a lot less needs to be capitalized  than before but I am not of the opinion that nothing needs to be capitalized.

[Terry53029]

Thanks for you reply @sjrcpa . I did omit one very important fact " cost of improvement is less than $10,000 or 2% of basis of building, not all improvements 😁. Still I have never took that into account. Have used the de minimis safe harbor, but have capitalized many roof replacements that have cost less than $10,000 for several small TP. Might have to change my thinking.

[qbteachmt]

I always have to research IRS against any internal policy for the client I am working with. The final regs that got issued were supposed to help clarify and simplify from the mishmash that existed prior to this (I have my notes dated from 2014 proposals to finals). I try to apply safe harbor when something else, such as GASB/FASB, won't apply. For example, I worked with someone that had a $1,000 policy limit and I got their board to raise that to $3,000. Plenty of repairs bump against $3k, nowadays. You seem to be learning about an Annual Election:

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Wh...

"You make the election to use the safe harbor for each taxable year in which qualifying amounts are incurred.

• The election is made by attaching a statement to your income tax return for the taxable year. See When and how do you make an election provided under the final tangibles regulations?
• An annual election is not a change in method of accounting. Therefore, you shouldn't file Form 3115, Application for Change in Method of Accounting, to make this election or to stop applying the safe harbor in a subsequent year."

[TaxGuyBill · Accepted solution]

---

@Terry53029 wrote:

I did omit one very important fact " cost of improvement is less than $10,000 or 2% of basis of building, not all improvements

---

That is a ELECTION called the Safe Harbor for Small Taxpayers.

However, the $10,000/2% amount is if ALL repairs, maintenance and improvements TOTAL under that amount for the year.  If it is over that amount, none of it qualifies and the improvements would be depreciated.  And remember, it is the LESSER of $10,000 or 2%.  So if the undepreciated building is less than $500,000, you need to calculate what the 2% would be.

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Sa...

[sjrcpa]

That important fact sounds correct. that was in the Regs, too.

[rbynaker]

I have a detail list on the repairs line for all of my Sch E properties, something to the effect:

Safe Harbor for Small Taxpayers:
Lesser of $10,000 or 2% of $xxx,xxx [using actual number for property] = $x,xxx.

Then I list the details underneath w/date, description, amount.

I also put in a reminder if I need to flip the election in the following year.  i.e. if 2019 has an $8K improvement vs. $4K 2% limit, I have to turn off the safe harbor election for 2019 and remember to turn it back on for 2020.

The good news, it is property by property so just because you fail on one property you can still use it on the others.

Rick