- Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use.
- Results in the rebuilding of the unit of property to a like-new condition after the end of its original useful life.
- Is for the replacement of a part or a combination of parts that comprises a major component or a substantial structural part of a unit of property.
3. An adaption to a new or different use.
A unit of property is a grouping of functionally interdependent components that must be placed in service together and at the same time in order to perform their intended function. For example, a computer would be a separate unit of property from a printer because they can be placed in service at different times and function independently. The mother board is required for the computer to work, so it’s a part of the computer.
If the computer came with a bad mother board, then the replacement is a betterment. If the computer is seven years old and needs a new mother board, then it is past its useful life and the mother board is a restoration. If the mother board significantly changes how the computer can be used, it’s an adaptation. In all three of these cases, the mother board has to be capitalized and depreciated.
Routine maintenance on property other than buildings is deductible as repairs and maintenance. Routine maintenance includes:
- Replacing parts
- Other recurring maintenance that keeps a unit of property in its ordinary efficient operating condition
In our computer example, if the mother board is replaced with the same model mother board within the computer’s useful life of five years, then it could be a repair unless the mother board is a major component of the computer.
Dealing with a relatively inexpensive item makes the risk of a mistake small. What about major items like manufacturing equipment and buildings? The IRS has divided buildings into various units of property each with potentially different useful lives:
- A building and its structural components
- Heating, ventilation and air conditioning systems
- Plumbing systems
- Fire protection and alarm systems
- Security systems
- Gas distribution systems
- Any other systems identified in guidance published by the IRS
If you have a large building with 15 air conditioning units and you have to replace one, it’s probably a repair. If you only had one unit to begin with, it has to be depreciated. Engineers and manufacturers can help determine what constitutes the unit of property and whether it has been repaired or improved. Planning is even more important than in the past. If you time it correctly, it is more likely a repair which can be deducted the same year. Your CPA can help you schedule the repairs to increase the likelihood of an immediate deduction.
Robin Hayden, MBA, CPA, Certified Fraud Examiner, is a shareholder with Houck & Associates PC, a CPA firm specializing in small businesses and their owners. She can be reached at 360.892.4348 or Robin@Houck-CPAs.com.