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I own a building leased to a nonprofit preschool. I was told by an accountant I could deduct the full $9K cost for repaving part of the lot as an expense vs. adding to the basis of the building/then depreciating.
A) Is this true? B) How is it done?
The IRS form /instructions don't seem to agree with the accountant.
Precision and detail in your response is necessary due to IRS sanctions if I get it wrong.
This depends on how you classify the nature of the new paving.
In accordance with the IRS publication on business expenses and rental expenses, this can be treated either way.
1. If the repaving is a repair of an existing surface, then it can be a repair. Repairs and maintenance can be expenses fully in the year they are paid for.
2. If this was an improvement, then it can be treated as a capital expense and added to the cost basis, and depreciated over time.
Here is what I tell my clients who have rental properties with this kind of issue:
You speak definitively, and have impressive credentials (what is GPHR), which generates the kind of confidence I need to proceed as you suggest.Please add the following to your previous response:Which publication are you citing in developing your answer (for business and rental expense)? My scenario for the partial paving was to simply have a new layer of asphalt added to an existing layer, so I elect the repair option.And I understand that payment to you is deductible as well. That's a schedule A item isn't it? And deductible for 2008? Or can it be used for 2007, this year?It may be a while before I can get back to your next response as I am multi-tasking, as they say now days.
I am using a number of sources. I want to add one caveat, to my comments. I assumed you were going to be making routine annual maintenance to the drive way annually.
There is a little known rules about the expected length of time of a repair that could through it into a capital expense. If the repair is of a nature, that lasts MORE than 12 months, then it would be expected, and have to be capitalized.
Generally, the nature of asphalt is such that even though you may resurface it, there is an ongoing "resurfacing" that occurs with repairing and patching of pot holes, cracks and the application of asphalt (liquid) to the surface annually.
After reading my resources, you may have a different opinion. Just remember, however you choose to treat it, you need to be consistent, and not change it up.
Note, I treat asphalt (not concrete or glassphalt) driveways in the same category as paint. Consider that paind lasts from 5 to 15 years, and is still treated as an expense by the IRS for rental properties. Asphalt driveways, when resurfaced add to the aesthetic beauty, but does not materially extend its life. The life expectancy of an asphalt surface is less than a paint job. Whereas the life expectancy of an asphalt drive way at large is much longer.
Here are my resources:
NOTE: GPHR is a certification from the society of human resource management called Global Professional Human Resources. Certification as a GPHR means I have demonstrated knowledge and expertise for cross boarder (international) taxes between the U.S. and foreign countries; international immigration, international employee relations, and international business operations.
The asphalt paving was definitely a repair, but not of an annual nature. We gained in appearances, but the real purpose was repair. So, returning to my initial query at the onset of this dialogue, is there a way to "one time" expense this in lieu of apportioning like depreciation. I badly need an offset to income.
OK, no I go with my original response, but let’s work through it, we have time.
1. Do not consider the drive way.
Before the repair when the drive way existed, and when it was first installed, did it add value to the property?
If this were appraised, the drive way should have added value to the property when it was first built. (Can we agree?)
A number of years pass, and the driveway is deteriorating, but useful it needs some repair, maybe it can go another year, but I want to repair it this year.
Generally, if the property were appraised on the day before you repaired it. The appraiser would not have discounted the value of the property. Most appraisals, unless the driveway were in such disrepair as to be useless, would not discount the appraisal. The question would be, does it have a paved drive way, yes or no.
So in all likely hood, the entire house and property were not depreciated because of the condition of the drive way. (Can we agree on this?)
Now comes the repair, did making a resurface increase the appraised value of the property or did it just make it look better, prettier, more aesthetic looking? My guess is, that unless that drive way was unusable, it did not increase the appraisal value of the home or land. (Can we agree on this?)
Then I would say this is like painting a house. There was no added value, even though it looked nicer and might be easier to market and sell.
While the depreciable life of the drive way is a 35 year property, in the construction industry, black top or asphalt slab is a 100 year life property. When you were done, it was still a 100 year property. The life of the integral whole was not necessarily extended.
Many thanks for investing your time and talents in my problem. I can concur with each of your positions/statements made in your 3rd response, and have only residual hesitations, the ones that always linger when I move into gray areas of IRS statutes. I customarily "pocket" a couple of deductions in case I goof and then have an offset against potential penalty. And I make notes to myself.Could you answer a couple E Z ones? Are the fees being paid you for these sessions deductible for 2007, or must I wait until 2008?AND... I elected an HSA (Health Savings Accountant) for medical costs for the year 2008, but pre funded it with a $1000. The check has a 2007 date. Will that prefunding check of $1000 have to wait until 2008 for deduction, or can it be used this year 2007?
You are good.
The tax prep fees are deductible in the year they are paid. So since this is 2008, you would include them on next year’s return.
If you are on cash accounting, the check issue date is considered the date paid, so you would count it in 2007.
Thank you sir.
You are welcome, and best of luck to you.
If your final decision is to expense the drive way repairs, make sure the entry merely says, driveway (or asphalt) repair.
Can do and will do the entry as asphalt repair.One final hair to split. The prefunding of my HSA account for 2008 did occur in 2007. The HSA did NOT exist in 2007. And this is for my personal 1040 and Sched A so it is cash accounting. Can I still take the Sched A deduction for 2007?
If the check was written in 2007, you can take the deduction in 2007.