Taxpayers with rental property often turn to accountants for help in translating complex IRS rules into accurate tax reporting. Property owners usually think that any money they spend to fix a real estate unit is a tax-deductible expense. Accountants who study for CPA exam completion know better. Some fix up costs are indeed repair expenses but others are depreciable capital costs.
This is the frequently confusing area of repair regulations that’s addressed in CPA study materials. The subject actually covers the tax deduction of both repairs and maintenance costs. IRS scrutiny is drawn to tax reporting that shows a substantial amount of repair costs for a single property. This is a consequence of larger outlays typically signaling capital improvements rather than repairs.
The IRS has attempted to tackle this issue on several occasions. Most recently, temporary regulations were issued at the end of 2008. In addition, proposed new regulations further confront the matter by introducing new interpretations. Because the concept of expensed repair versus depreciable capital cost is common for all property owners, this topic is crucial for CPA review classes.
Significant elements to define include what constitutes a property improvement and a specific property unit. Tax accountants are asked to relieve taxpayer struggles with understanding these issues. For example, one general rule is that a larger property – such as a commercial building – usually results in the likelihood of deductible repairs even when the amount is fairly high. Conversely, most CPA exam questions that refer to small units of property with high expenditures are usually describing capital improvements.
The new IRS rules define a single building as a unit of property. Therefore, structural changes to one office in the building are probably repair expenses. An expenditure is treated as a capital improvement when it affects the entire building. This means that plumbing changes to one office are normally expensed while adjustments to the building’s plumbing system are capitalized improvements. The new regulations identify each system that performs a discrete and major function as a unit of property.
Also clarified in the new regulations are three tests for expenditures. Costs are capitalized when they cause either “betterment”, “restoration”, or “adaptation” for a unit of property. This causes accountants to resort to the process of evaluating the facts and circumstances of each case.
Consequently, a taxpayer’s detailed record of expenditures is extremely important. That is particularly true when multiple payments are made for a common project. Accountants engaged in tax work can expect to spend plenty of time investigating the specifics surrounding costs for materials, parts, and mass purchases of these items. Fortunately, they will already develop a sound foundation in this subject in order to pass CPA exam requirements.
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