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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 14860
Experience:  15years with H & R Block. Divisional leader, Instructor
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Periodically my client is required by the franchise he is

Customer Question

Periodically my client is required by the franchise he is operating to upgrade or "refresh" his store locations. The changes are cosmetic in nature but very expensive! With the new clarifications and guidelines for repairs vs capital improvements I believe the cost can be classified as a repair but I am really concerned about the dollar amount of 96K. What is your opinion?
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Hello,

Under audit an agent would look at the following:

  1. Analyze detailed records to determine the reason the work was undertaken. Consider carefully all underlying documentation including Management Reports, Engineering Assessments and Invoice Language.
  2. Determine extent to which costs were treated as UOP separate from the primary UOP.
  3. Determine asset’s age, acquisition date, and any prior completed work that is related to that asset.
  4. Determine the purpose of project. Consider what was done, why it was done and the dates the project began and ended. Consider how soon the work will have to be repeated. Consider Long-Term projects and consider whether expenditures:
    1. Result in new assets.
    2. Improve the property, putting it in a better operating condition.
    3. Add new components or material sub-components.
    4. Add upgrades or modifications.
    5. Enhance the value of the property in the nature of a betterment.
    6. Extend the useful life of the property.
    7. Improve the efficiency, quality, strength, or capacity of the property. viii. Adapt the property to a new use.

The "new" clarifications this has still not really changed. As long as the above seven are not accomplished the expense is still repair and not capital.

The dollar amount is high but, if the costs do not add to the value and are truly cosmetic with no added components then it would not be capital.

Capitalization is required for amounts that are "reasonably expected" to materially increase one of the factors.