I spent money fixing up something the business already owns — is that a repair I can deduct, or an improvement I have to capitalize?

Is the work a repair or an improvement? The three tests

For purposes of this section a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer are for a betterment to the unit of property, restore the unit of property, or adapt the unit of property to a new or different use. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to activities performed after the property is placed in service by the taxpayer; applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“For purposes of this section, a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer— (1) Are for a betterment to the unit of property (see paragraph (j) of this section); (2) Restore the unit of property (see paragraph (k) of this section); or (3) Adapt the unit of property to a new or different use (see paragraph (l) of this section).”

A taxpayer must capitalize as an improvement an amount paid for a betterment to a unit of property, and an amount is paid for a betterment only if it ameliorates a material condition or defect that either existed prior to the taxpayer's acquisition of the unit of property or arose during its production (whether or not the taxpayer was aware of the condition or defect at the time of acquisition or production); is for a material addition, including a physical enlargement, expansion, extension or addition of a major component, or a material increase in the capacity, including additional cubic or linear space, of the unit of property; or is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of the unit of property. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(j) Capitalization of betterments—(1) In general. A taxpayer must capitalize as an improvement an amount paid for a betterment to a unit of property. An amount is paid for a betterment to a unit of property only if it— (i) Ameliorates a material condition or defect that either existed prior to the taxpayer’s acquisition of the unit of property or arose during the production of the unit of property, whether or not the taxpayer was aware of the condition or defect at the time of acquisition or production; (ii) Is for a material addition, including a physical enlargement, expansion, extension, or addition of a major component (as defined in paragraph (k)(6) of this section) to the unit of property or a material increase in the capacity, including additional cubic or linear space, of the unit of property; or (iii) Is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of the unit of property.”

The federal rule: repairs are deducted, improvements are capitalized

Except as provided in paragraph (h) or paragraph (n) of this section or under the de minimis safe harbor of section 1.263(a)-1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3)) paid to improve a unit of property owned by the taxpayer. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: stated as 'generally' must capitalize; stated exceptions: paragraph (h), paragraph (n), and section 1.263(a)-1(f); applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(d) Requirement to capitalize amounts paid for improvements. Except as provided in paragraph (h) or paragraph (n) of this section or under § 1.263(a)–1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3) of this section) paid to improve a unit of property owned by the taxpayer.”

A taxpayer may deduct amounts paid for repairs and maintenance to tangible property if those amounts are not otherwise required to be capitalized; the provision states the deduction as permitted subject to that condition and does not itself set out the capitalization criteria. (jurisdiction: United States (federal income tax law; Internal Revenue Code and Treasury Regulations, 26 CFR part 1), entity_scope: Taxpayers paying amounts for repairs and maintenance to tangible property, accounting_basis: federal income tax, effective_from: 2014-01-01, conditions: Applies only if the amounts paid are not otherwise required to be capitalized.; Under § 1.162–4(c)(1) this section applies to taxable years beginning on or after January 1, 2014; under § 1.162–4(c)(2) a taxpayer may choose to apply it to taxable years beginning on or after January 1, 2012.; Text as it appears in the 26 CFR Ch. I edition revised as of April 1, 2025.)

“(a) In general. A taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized.”

A taxpayer must capitalize all the direct costs of an improvement and all the indirect costs (including, for example, otherwise deductible repair costs) that directly benefit or are incurred by reason of an improvement; indirect costs arising from activities that do not directly benefit and are not incurred by reason of an improvement are not required to be capitalized under section 263(a), regardless of whether the activities are performed at the same time as an improvement. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(g) Special rules for determining improvement costs—(1) Certain costs incurred during an improvement—(i) In general. A taxpayer must capitalize all the direct costs of an improvement and all the indirect costs (including, for example, otherwise deductible repair costs) that directly benefit or are incurred by reason of an improvement. Indirect costs arising from activities that do not directly benefit and are not incurred by reason of an improvement are not required to be capitalized under section 263(a), regardless of whether the activities are performed at the same time as an improvement.”

A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance (as defined under section 1.162-4) to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation, if the taxpayer incurs these amounts in carrying on its trade or business and treats these amounts as capital expenditures on its books and records regularly used in computing income; a taxpayer that elects must apply the election to all amounts paid for repair and maintenance to tangible property that it treats as capital expenditures on its books and records in that taxable year. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers carrying on a trade or business that treat repair and maintenance as capital expenditures on their books and records, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: the election is conditioned on the amounts being treated as capital expenditures on the taxpayer's books and records regularly used in computing income; the election applies to all such amounts for that taxable year; applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(n) Election to capitalize repair and maintenance costs—(1) In general. A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance (as defined under § 1.162–4) to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation if the taxpayer incurs these amounts in carrying on the taxpayer’s trade or business and if the taxpayer treats these amounts as capital expenditures on its books and records regularly used in computing income (‘‘books and records’’). A taxpayer that elects to apply this paragraph (n) in a taxable year must apply this paragraph to all amounts paid for repair and maintenance to tangible property that it treats as capital expenditures on its books and records in that taxable year.”

Partly established. Established: the criteria under federal tax rules that distinguish deductible repair and maintenance from amounts that must be capitalized as a betterment, restoration or adaptation of a unit of property (S01); how an amount covering both maintenance and capitalizable work is allocated between the two conclusions (S07, S25). Missing: whether the treatment claimed on the return must correspond to the treatment recorded in the books.

Identify the asset the work was done on before you test anything

Except as otherwise provided in paragraphs (e)(4) and (e)(5)(ii), in the case of a building each building and its structural components is a single unit of property. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(2) Building—(i) In general. Except as otherwise provided in paragraphs (e)(4), and (e)(5)(ii) of this section, in the case of a building (as defined in § 1.48– 1(e)(1)), each building and its structural components (as defined in § 1.48–1(e)(2)) is a single unit of property (‘‘building’’).”

Each of the listed structural components, including the components thereof, constitutes a building system that is separate from the building structure and to which the improvement rules must be applied; the components listed are HVAC systems, plumbing systems, electrical systems, all escalators, all elevators, fire-protection and alarm systems, security systems for the protection of the building and its occupants, gas distribution systems, and other structural components identified in published guidance as excepted from the building structure and designated as building systems. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: the items within each system are introduced by 'including' and are not stated as an exhaustive list; applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(B) Building system. Each of the following structural components (as defined in § 1.48–1(e)(2)), including the components thereof, constitutes a building system that is separate from the building structure, and to which the improvement rules must be applied— (1) Heating, ventilation, and air conditioning (‘‘HVAC’’) systems (including motors, compressors, boilers, furnace, chillers, pipes, ducts, radiators); (2) Plumbing systems (including pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste to and from the property line and between buildings and other permanent structures); (3) Electrical systems (including wiring, outlets, junction boxes, lighting fixtures and associated connectors, and site utility equipment used to distribute electricity from the property line to and between buildings and other permanent structures); (4) All escalators; (5) All elevators; (6) Fire-protection and alarm systems (including sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detection devices, fire escapes, fire doors, emergency exit lighting and signage, and fire fighting equipment, such as extinguishers, and hoses); (7) Security systems for the protection of the building and its occupants (including window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit); (8) Gas distribution system (including associated pipes and equipment used to distribute gas to and from the property line and between buildings or permanent structures); and (9) Other structural components identified in published guidance in the FEDERAL REGISTER or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) that are excepted from the building structure under paragraph (e)(2)(ii)(A) of this section and are specifically designated as building systems under this section.”

Except as otherwise provided in paragraphs (e)(3), (e)(4), (e)(5) and (f)(1), in the case of real or personal property other than a building, all the components that are functionally interdependent comprise a single unit of property; components are functionally interdependent if the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(3) Property other than building—(i) In general. Except as otherwise provided in paragraphs (e)(3), (e)(4), (e)(5), and (f)(1) of this section, in the case of real or personal property other than property described in paragraph (e)(2) of this section, all the components that are functionally interdependent comprise a single unit of property. Components of property are functionally interdependent if the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer.”

As an example, if the unit of property is an automobile and the engine — a major component — is replaced, that replacement would generally be capitalized because Section 1.263(a)-3(k)(6) requires capitalization of a part or combination of parts comprising a major component. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers filing US federal income tax returns that hold tangible property used in a trade or business, accounting_basis: US federal income tax)

“For example, if the UOP is an automobile (personal property) and the engine (major component) is replaced, that replacement would generally be capitalized because Section 1.263(a)-3(k)(6) requires capitalization of a part or combination of parts that comprise a major component.”

How the unit of property is determined

The unit of property rules in paragraph (e) apply only for purposes of section 263(a) and sections 1.263(a)-1, 1.263(a)-2, 1.263(a)-3 and 1.162-3; unless otherwise specified the unit of property determination is based on the functional interdependence standard in paragraph (e)(3)(i), and special rules are provided for buildings, plant property, network assets, leased property and improvements to property. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(e) Determining the unit of property— (1) In general. The unit of property rules in this paragraph (e) apply only for purposes of section 263(a) and §§ 1.263(a)–1, 1.263(a)–2, 1.263(a)–3, and 1.162–3. Unless otherwise specified, the unit of property determination is based upon the functional interdependence standard provided in paragraph (e)(3)(i) of this section. However, special rules are provided for buildings (see paragraph (e)(2) of this section), plant property (see paragraph (e)(3)(ii) of this section), network assets (see paragraph (e)(3)(iii) of this section), leased property (see paragraph (e)(2)(v) of this section for leased buildings and paragraph (e)(3)(iv) of this section for leased property other than buildings), and improvements to property (see paragraph (e)(4) of this section).”

The building structure consists of the building and its structural components other than the structural components designated as building systems in paragraph (e)(2)(ii)(B). (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“defined in § 1.48–1(e)(1)), and its structural components (as defined in § 1.48– 1(e)(2)), other than the structural components designated as buildings systems in paragraph (e)(2)(ii)(B) of this section.”

For a taxpayer that is a lessee of all or a portion of a building, the unit of property (leased building property) is each building and its structural components, or the portion of each building subject to the lease and the structural components associated with the leased portion. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: lessees of a building or of a portion of a building, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“the case of a taxpayer that is a lessee of all or a portion of a building (such as an office, floor, or certain square footage), the unit of property (‘‘leased building property’’) is each building and its structural components or the portion of each building subject to the lease and the structural components associated with the leased portion.”

Under the final regulations the examiner must consider certain building systems separately from the building structure in determining whether an improvement has occurred to the building, while in other cases little has changed — for example a truck, including its components, was generally considered a unit of property and still is. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers filing US federal income tax returns that hold tangible property used in a trade or business, accounting_basis: US federal income tax)

“Under the final regulations, the examiner must consider certain building systems separate from the building structure in determining whether an improvement has occurred to the building. In other cases, not much has changed. For example, a truck, including its components, was generally considered a UOP, and it still is.”

Relief provisions that let you expense an amount you would otherwise capitalize

A taxpayer that has an applicable financial statement (AFS) may use the de minimis safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item, as substantiated by invoice. (jurisdiction: United States (federal income tax), entity_scope: taxpayers with an applicable financial statement (AFS), accounting_basis: federal income tax, effective_from: 2014-01-01, conditions: amount applied per invoice or per item as substantiated by invoice)

“If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice).”

A taxpayer without an AFS may use the de minimis safe harbor to deduct amounts up to $2,500 per invoice or item ($500 for amounts prior to Jan. 1, 2016), as substantiated by invoice. (jurisdiction: United States (federal income tax), entity_scope: taxpayers without an applicable financial statement (AFS), accounting_basis: federal income tax, effective_from: 2016-01-01, conditions: $500 limitation applied prior to Jan. 1, 2016; amount applied per invoice or per item as substantiated by invoice)

“If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice).”

A qualifying taxpayer may elect not to apply paragraph (d) or paragraph (f) to an eligible building property if the total amount paid during the taxable year for repairs, maintenance, improvements and similar activities performed on that eligible building property does not exceed the lesser of 2 percent of the unadjusted basis of the eligible building property or $10,000. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: qualifying taxpayers (paragraph (h)(3)) with eligible building property (paragraph (h)(4)), accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applied per eligible building property; limit is the lesser of 2 percent of unadjusted basis or $10,000; applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(h) Safe harbor for small taxpayers—(1) In general. A qualifying taxpayer (as defined in paragraph (h)(3) of this section) may elect to not apply paragraph (d) or paragraph (f) of this section to an eligible building property (as defined in paragraph (h)(4) of this section) if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible building property does not exceed the lesser of— (i) 2 percent of the unadjusted basis (as defined under paragraph (h)(5) of this section) of the eligible building property; or (ii) $10,000.”

An amount paid for routine maintenance, as defined in paragraph (i)(1)(i) or (i)(1)(ii) as applicable, on a unit of tangible property, or in the case of a building on any of the building properties designated in paragraphs (e)(2)(ii), (e)(2)(iii)(B), (e)(2)(iv)(B) or (e)(2)(v)(B), is deemed not to improve that unit of property. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(i) Safe harbor for routine maintenance on property—(1) In general. An amount paid for routine maintenance (as defined in paragraph (i)(1)(i) or (i)(1)(ii) of this section, as applicable) on a unit of tangible property, or in the case of a building, on any of the properties designated in paragraphs (e)(2)(ii), (e)(2)(iii)(B), (e)(2)(iv)(B), or paragraph (e)(2)(v)(B) of this section, is deemed not to improve that unit of property.”

Not established from an authoritative source.

What each relief requires you to have in place already

For the de minimis safe harbor to apply to a taxpayer under paragraph (f)(1)(i), the taxpayer must have an applicable financial statement as defined in paragraph (f)(4); must have at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; and must treat the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers that have an applicable financial statement (as defined in § 1.263(a)–1(f)(4)) and elect the de minimis safe harbor, accounting_basis: United States federal income tax, with the condition referring to the taxpayer's applicable financial statement and its written accounting procedures for non-tax purposes, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f); the taxpayer has an applicable financial statement as defined in § 1.263(a)–1(f)(4))

“(A) The taxpayer has an applicable financial statement (as defined in paragraph (f)(4) of this section); (B) The taxpayer has at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes— (1) Amounts paid for property costing less than a specified dollar amount; or (2) Amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; (C) The taxpayer treats the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures; and”

The de minimis safe harbor election may not be made through the filing of an application for change in accounting method or, before obtaining the Commissioner's consent to make a late election, by filing an amended Federal tax return; and a taxpayer may not revoke an election made under paragraph (f). (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f))

“An election may not be made through the filing of an application for change in accounting method or, before obtaining the Commissioner’s consent to make a late election, by filing an amended Federal tax return. A taxpayer may not revoke an election made under this paragraph (f).”

Routine maintenance may be performed any time during the useful life of the building structure or building systems; however, the activities are routine only if the taxpayer reasonably expects to perform the activities more than once during the 10-year period beginning at the time the building structure or the building system upon which the routine maintenance is performed is placed in service by the taxpayer. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers with a building unit of property, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: the 10-year period begins when the building structure or building system concerned is placed in service by the taxpayer; applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“Routine maintenance may be performed any time during the useful life of the building structure or building systems. However, the activities are routine only if the taxpayer reasonably expects to perform the activities more than once during the 10-year period beginning at the time the building structure or the building system upon which the routine maintenance is performed is placed in service by the taxpayer.”

Not established from an authoritative source.

One invoice covering both maintenance and improvement work

See A taxpayer must capitalize all the direct costs of an improvement and all the indirect costs (including, for example, otherwise deductible repair costs) that directly benefit or are incurred by reason of an improvement; indirect costs arising from activities that do not directly benefit and are not incurred by reason of an improvement are not required to be capitalized under section 263(a), regardless of whether the activities are performed at the same time as an improvement.

The regulations under Section 1.263(a)-3(g) require taxpayers to capitalize all direct and indirect costs of an improvement, including costs that would otherwise be deductible as repair costs, if they directly benefit or are incurred by reason of an improvement; indirect costs such as repair and maintenance costs that do not directly benefit and are not incurred by reason of an improvement are not required to be capitalized under Section 263(a) regardless of whether they are incurred at the same time as an improvement — so interior painting, generally a currently deductible repair, must be treated as part of the improvement and capitalized where it benefits the improvement or is incurred by reason of it. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers filing US federal income tax returns that hold tangible property used in a trade or business, accounting_basis: US federal income tax)

“The regulations under Section 1.263(a)-3(g) require taxpayers to capitalize all direct and indirect costs of an improvement, including those costs that would otherwise be deductible as repair costs if they directly benefit or are incurred by reason of an improvement. This rule is based on the language of Section 263A and sets out a clear rule for determining when otherwise deductible indirect costs must be capitalized as part of an improvement to property. However, indirect costs, such as repair and maintenance costs that do not directly benefit and are not incurred by reason of an improvement to a UOP are not required to be capitalized under Section 263(a), regardless of whether they are incurred at the same time as an improvement. For example, painting the interior of a building is generally a currently deductible repair. But, if a taxpayer makes changes to the interior of a building resulting in an improvement to the building UOP, and the interior painting benefits the improvement or is incurred by reason of the improvement, then such painting costs must be treated as part of the improvement to the building UOP and capitalized accordingly.”

Among the examination considerations, examiners are directed to ask whether the taxpayer maintains a work order system for all capital expenditures and major repair jobs tracking all project costs. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: IRS examiners reviewing an improvement issue, accounting_basis: US federal income tax)

“Does the taxpayer maintain a work order system for all capital expenditures and major repair jobs tracking all project costs?”

For purposes of paragraph (d), amounts paid to improve a unit of property include amounts paid over a period of more than one taxable year, and whether amounts are related to the same improvement depends on the facts and circumstances of the activities being performed. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(3) Related amounts. For purposes of paragraph (d) of this section, amounts paid to improve a unit of property include amounts paid over a period of more than one taxable year. Whether amounts are related to the same improvement depends on the facts and circumstances of the activities being performed.”

Partly established. Established: how a single invoice covering both maintenance and improvement work is analysed and allocated between the two conclusions (S07, S25). Missing: what the invoice or the contractor's scope of work must show for the allocation to stand up.

Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: primary regulator or government.

Work done to get a newly bought asset ready to use

The amounts paid to acquire or produce a unit of real or personal property include the invoice price, transaction costs determined under paragraph (f), and costs for work performed before the date the unit of property is placed in service by the taxpayer (determined without regard to any applicable section 168(d) convention); the list is stated as an inclusion, not a closed list. (jurisdiction: United States (federal income tax), entity_scope: taxpayers subject to U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: taxable years beginning on or after January 1, 2014, conditions: placed-in-service date determined without regard to any applicable convention under section 168(d))

“Amounts paid to acquire or produce a unit of real or personal property include the invoice price, transaction costs as determined under paragraph (f) of this section, and costs for work performed prior to the date that the unit of property is placed in service by the taxpayer (without regard to any applicable convention under section 168(d)).”

The regulation illustrates that amounts a purchaser pays to repair cement steps, refinish wood floors, patch holes in walls and paint a building before placing it in service must be capitalized under paragraph (d)(1) as amounts to acquire the building unit of property, because the work was performed prior to the taxpayer's placing the building in service — even though the same work is assumed not to constitute an improvement under § 1.263(a)–3. (jurisdiction: United States (federal income tax), entity_scope: taxpayer 'M' in the regulation's example (purchaser of a building for use as a business office), accounting_basis: U.S. federal income tax, effective_from: taxable years beginning on or after January 1, 2014, conditions: the regulation's stated assumptions for the example; work assumed not to constitute an improvement to the building or its structural components under § 1.263(a)–3; building and its structural components treated as a single unit of property under § 1.263(a)–3(e)(2)(i))

“Assume that the work that M performs does not constitute an improvement to the building or its structural components under § 1.263(a)–3. Under § 1.263–3(e)(2)(i), the building and its structural components is a single unit of property. Under paragraph (d)(1) of this section, the amounts paid must be capitalized as amounts to acquire the building unit of property because they were for work performed prior to M’s placing the building in service.”

The regulation illustrates that amounts paid for periodic quality control testing performed after the machine is placed in service are not required to be capitalized as amounts paid to acquire the machine. (jurisdiction: United States (federal income tax), entity_scope: taxpayer 'N' in the regulation's example (purchaser of a new machine for an existing production line), accounting_basis: U.S. federal income tax, effective_from: taxable years beginning on or after January 1, 2014, conditions: the regulation's stated assumptions for the example; testing performed after the machine was placed in service)

“However, amounts paid for periodic quality control testing after N placed the machine in service are not required to be capitalized as amounts paid to acquire the machine.”

When an asset is capitalized, the total cost of acquiring it is included in the cost of the asset, including additional costs beyond the purchase price such as shipping costs, taxes, assembly and legal fees (an open, illustrative list). (jurisdiction: United States, entity_scope: Businesses capitalizing an acquired asset, accounting_basis: US GAAP, as described in an introductory financial accounting textbook)

“When capitalizing an asset, the total cost of acquiring the asset is included in the cost of the asset. This includes additional costs beyond the purchase price, such as shipping costs, taxes, assembly, and legal fees.”

Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: high quality professional secondary reference, primary regulator or government.

Amounts paid to acquire property and put it into service

See The amounts paid to acquire or produce a unit of real or personal property include the invoice price, transaction costs determined under paragraph (f), and costs for work performed before the date the unit of property is placed in service by the taxpayer (determined without regard to any applicable section 168(d) convention); the list is stated as an inclusion, not a closed list.

A taxpayer must capitalize amounts paid to acquire or produce a unit of real or personal property (the unit being determined under § 1.263(a)–3(e)); the property types listed — leasehold improvements, land and land improvements, buildings, machinery and equipment, and furniture and fixtures — are given as inclusions, and the requirement is subject to the exceptions for materials and supplies under § 1.162–3 and the de minimis safe harbor election under § 1.263(a)–1(f). (jurisdiction: United States (federal income tax), entity_scope: taxpayers subject to U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: taxable years beginning on or after January 1, 2014, conditions: unit of property determined under § 1.263(a)–3(e); except as provided in § 1.162–3 (materials and supplies); except as provided in § 1.263(a)–1(f) (de minimis safe harbor election))

“Except as provided in § 1.162–3 (relating to materials and supplies) and in § 1.263(a)–1(f) (providing a de minimis safe harbor election), a taxpayer must capitalize amounts paid to acquire or produce a unit of real or personal property (as determined under § 1.263(a)– 3(e)), including leasehold improvements, land and land improvements, buildings, machinery and equipment, and furniture and fixtures.”

The regulation illustrates that amounts paid to install a newly purchased machine and to perform a critical test on it before it is placed in service must be capitalized under paragraph (d)(1) as amounts to acquire the machine. (jurisdiction: United States (federal income tax), entity_scope: taxpayer 'N' in the regulation's example (purchaser of a new machine for an existing production line), accounting_basis: U.S. federal income tax, effective_from: taxable years beginning on or after January 1, 2014, conditions: the regulation's stated assumptions for the example; machine assumed to be a unit of property under § 1.263(a)–3(e); assumed not a material or supply under § 1.162–3)

“Under paragraph (d)(1) of this section, the amounts paid for the installation and the critical test performed before the machine is placed in service must be capitalized by N as amounts to acquire the machine.”

Amounts required to be capitalized under this section are capital expenditures and must be taken into account through a charge to capital account or basis, or, for property that is inventory in the taxpayer's hands, through inclusion in inventory costs. (jurisdiction: United States (federal income tax), entity_scope: taxpayers subject to U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: taxable years beginning on or after January 1, 2014)

“Amounts required to be capitalized under this section are capital expenditures and must be taken into account through a charge to capital account or basis, or in the case of property that is inventory in the hands of a taxpayer, through inclusion in inventory costs.”

Recording the outcome: expense account, addition to the asset, or a new asset line

Routine repairs, such as brake pad replacements on a vehicle, are recorded as repair and maintenance expense. (jurisdiction: United States, entity_scope: Illustrative example of automobile repairs, accounting_basis: US GAAP, as described in an introductory financial accounting textbook, conditions: Illustrative list introduced by “such as”, not closed)

“Routine repairs such as brake pad replacements are recorded as repair and maintenance expense.”

In the textbook’s illustration, where a supercharger added to a car increases the car’s performance, that cost should be included as part of the vehicle asset. (jurisdiction: United States, entity_scope: Illustrative example of a modification to an owned automobile, accounting_basis: US GAAP, as described in an introductory financial accounting textbook, conditions: Modification increases the asset’s performance; Stated as an example)

“For example, if a supercharger is added to a car to increase its horsepower, the car’s performance is increased, and the cost should be included as a part of the vehicle asset.”

Where those conditions are met, the tenant records the expenditure as a fixed asset of its own and amortizes that asset over the lesser of the remaining lease term or the useful life of the improvement. (jurisdiction: United States, entity_scope: Tenant (lessee) meeting the source's three capitalization conditions, conditions: Only where the tenant paid, the amount exceeds the tenant's capitalization limit, and use spans more than one reporting period)

“If so, the tenant records the investment as a fixed asset and amortizes it over the lesser of the remaining term of the lease or the useful life of the improvement.”

In the textbook’s illustration, six-monthly cleaning and maintenance that neither extends the machine’s useful life beyond the original estimate, nor increases its capacity, nor improves the quality of its output would be expensed within the current period. (jurisdiction: United States, entity_scope: Illustrative servicing of Liam’s silk-screening machine, accounting_basis: US GAAP, as described in an introductory financial accounting textbook, conditions: Service does not extend useful life beyond the original estimate; Service does not increase capacity; Service does not improve output quality; Stated as an example)

“For example, if a service company cleans and maintains Liam’s silk-screening machine every six months, that service does not extend the useful life of the machine beyond the original estimate, increase the capacity of the machine, or improve the quality of the silk-screening performed by the machine. Therefore, this maintenance would be expensed within the current period.”

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

The accounting treatment of later spending on an asset you already hold

See When an asset is capitalized, the total cost of acquiring it is included in the cost of the asset, including additional costs beyond the purchase price such as shipping costs, taxes, assembly and legal fees (an open, illustrative list).

An amount spent on an asset is considered a current expense, charged in the current period, if the amount incurred did not help to extend the asset’s life or improve it. (jurisdiction: United States, entity_scope: Businesses incurring further costs on long-term assets already held, accounting_basis: US GAAP, as described in an introductory financial accounting textbook)

“An amount spent is considered a current expense , or an amount charged in the current period, if the amount incurred did not help to extend the life of or improve the asset.”

In the textbook’s illustration, an upgrade to the machine’s circuit board that increases the machine’s future capabilities would be capitalized and depreciated over its useful life. (jurisdiction: United States, entity_scope: Illustrative upgrade to Liam’s silk-screening machine, accounting_basis: US GAAP, as described in an introductory financial accounting textbook, conditions: Upgrade increases the asset’s future capabilities; Stated as an example)

“In contrast, if Liam had the company upgrade the circuit board of the silk-screening machine, thereby increasing the machine’s future capabilities, this would be capitalized and depreciated over its useful life.”

The source states three conditions under which a leasehold improvement is considered an asset of the tenant in accounting: the tenant paid for it, the investment exceeds the tenant's capitalization limit, and the improvements will be usable for more than one reporting period. (jurisdiction: United States, entity_scope: Tenant (lessee) that paid for the improvement, conditions: Tenant paid for the improvement; Investment exceeds the tenant's capitalization limit; Improvements usable for more than one reporting period)

“In accounting, a leasehold improvement is considered an asset of the tenant if the tenant paid for it, the investment exceeds the capitalization limit of the tenant, and the improvements will be usable for more than one reporting period .”

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

Capitalizing a replacement: the part that came out

A taxpayer may elect under paragraph (d)(2) to apply this section to a disposition of a portion of an asset. (jurisdiction: United States (federal), entity_scope: taxpayers that own MACRS property, or depreciable property that would be MACRS property but for an election to expense or amortize its cost under the provisions listed in paragraph (a), within the scope of 26 CFR 1.168(i)-8, accounting_basis: U.S. federal income tax; MACRS depreciation under IRC section 168, effective_from: taxable years beginning on or after 2014-01-01, conditions: A taxpayer may choose to apply this section to taxable years beginning on or after January 1, 2012 (paragraph (j)(2)))

“A taxpayer may make an election under this paragraph (d)(2) to apply this section to a disposition of a portion of an asset.”

An improvement or addition placed in service after the taxpayer placed the underlying asset in service — and, if applicable, its structural components — is a separate asset for purposes of this section. (jurisdiction: United States (federal), entity_scope: taxpayers that own MACRS property, or depreciable property that would be MACRS property but for an election to expense or amortize its cost under the provisions listed in paragraph (a), within the scope of 26 CFR 1.168(i)-8, accounting_basis: U.S. federal income tax; MACRS depreciation under IRC section 168, effective_from: taxable years beginning on or after 2014-01-01, conditions: A taxpayer may choose to apply this section to taxable years beginning on or after January 1, 2012 (paragraph (j)(2)))

“If the taxpayer places in service an improvement or addition to an asset after the taxpayer placed the asset in service, the improvement or addition and, if applicable, its structural components are a separate asset.”

In the regulation's Example 1 (owner A replaces one of four elevators in an office building), because A does not make the partial disposition election for the elevator, the retirement of the replaced elevator is not a disposition, depreciation continues on the building cost including the retired elevator's cost, and A recognizes no loss for the retired elevator. (jurisdiction: United States (federal), entity_scope: illustrative example in § 1.168(i)-8(i): taxpayer A owning an office building with four elevators, replacing one elevator, accounting_basis: U.S. federal income tax; MACRS depreciation under IRC section 168, effective_from: taxable years beginning on or after 2014-01-01, conditions: A taxpayer may choose to apply this section to taxable years beginning on or after January 1, 2012 (paragraph (j)(2)); Example facts: the elevator is a structural component of the office building and the building including its structural components is the asset for disposition purposes under paragraph (c)(4)(ii)(A); Example facts: A does not make the partial disposition election)

“A does not make the partial disposition election provided under paragraph (d)(2) of this section for the elevator. Thus, the retirement of the replaced elevator is not a disposition. As a result, depreciation continues for the cost of the building, including the cost of the retired elevator and the building’s other structural components, and A does not recognize a loss for this retired elevator.”

If a taxpayer disposes of a component of a unit of property but the disposal of the component is not a disposition for Federal tax purposes, then the taxpayer must deduct or capitalize the costs of removing the component based on whether the removal costs directly benefit or are incurred by reason of a repair to the unit of property or an improvement to the unit of property. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“If a taxpayer disposes of a component of a unit of property, but the disposal of the component is not a disposition for Federal tax purposes, then the taxpayer must deduct or capitalize the costs of removing the component based on whether the removal costs directly benefit or are incurred by reason of a repair to the unit of property or an improvement to the unit of property.”

Not established from an authoritative source.

Removing a replaced component from the asset record

A disposition includes a disposition of a portion of an asset in the listed situations — a section 165 casualty event, a portion disposition where gain is not recognized in whole or in part under section 1031 or 1033 (determined without regard to section 1245 or 1250), a transfer described in section 168(i)(7)(B), or a sale of a portion — even if the taxpayer does not make the partial disposition election for that portion. (jurisdiction: United States (federal), entity_scope: taxpayers that own MACRS property, or depreciable property that would be MACRS property but for an election to expense or amortize its cost under the provisions listed in paragraph (a), within the scope of 26 CFR 1.168(i)-8, accounting_basis: U.S. federal income tax; MACRS depreciation under IRC section 168, effective_from: taxable years beginning on or after 2014-01-01, conditions: A taxpayer may choose to apply this section to taxable years beginning on or after January 1, 2012 (paragraph (j)(2)))

“For purposes of applying this section, a disposition includes a disposition of a portion of an asset as a result of a casualty event described in section 165, a disposition of a portion of an asset for which gain, determined without regard to section 1245 or section 1250, is not recognized in whole or in part under section 1031 or section 1033, a transfer of a portion of an asset in a transaction described in section 168(i)(7)(B), or a sale of a portion of an asset, even if the taxpayer does not make the election under paragraph (d)(2)(i) of this section for that disposed portion.”

For transactions other than those listed in the preceding sentence of (d)(1), a disposition includes a disposition of a portion of an asset only if the taxpayer makes the paragraph (d)(2)(i) election for that disposed portion. (jurisdiction: United States (federal), entity_scope: taxpayers that own MACRS property, or depreciable property that would be MACRS property but for an election to expense or amortize its cost under the provisions listed in paragraph (a), within the scope of 26 CFR 1.168(i)-8, accounting_basis: U.S. federal income tax; MACRS depreciation under IRC section 168, effective_from: taxable years beginning on or after 2014-01-01, conditions: A taxpayer may choose to apply this section to taxable years beginning on or after January 1, 2012 (paragraph (j)(2)))

“For other transactions, a disposition includes a disposition of a portion of an asset only if the taxpayer makes the election under paragraph (d)(2)(i) of this section for that disposed portion.”

The unadjusted depreciable basis of the asset must be reduced by the unadjusted depreciable basis of the disposed portion, as of the first day of the taxable year in which the disposition occurs; paragraph (f)(3)(i) governs determining that basis. (jurisdiction: United States (federal), entity_scope: taxpayers that own MACRS property, or depreciable property that would be MACRS property but for an election to expense or amortize its cost under the provisions listed in paragraph (a), within the scope of 26 CFR 1.168(i)-8, accounting_basis: U.S. federal income tax; MACRS depreciation under IRC section 168, effective_from: taxable years beginning on or after 2014-01-01, conditions: A taxpayer may choose to apply this section to taxable years beginning on or after January 1, 2012 (paragraph (j)(2)); Applies only where the taxpayer disposes of a portion of an asset and paragraph (d)(1) of this section applies to that disposition)

“The unadjusted depreciable basis of the asset must be reduced by the unadjusted depreciable basis of the disposed portion as of the first day of the taxable year in which the disposition occurs. See paragraph (f)(3)(i) of this section for determining the unadjusted depreciable basis of the disposed portion;”

The depreciation reserve of the asset must be reduced by the greater of the depreciation allowed or allowable for the disposed portion as of the end of the taxable year immediately preceding the year of disposition. (jurisdiction: United States (federal), entity_scope: taxpayers that own MACRS property, or depreciable property that would be MACRS property but for an election to expense or amortize its cost under the provisions listed in paragraph (a), within the scope of 26 CFR 1.168(i)-8, accounting_basis: U.S. federal income tax; MACRS depreciation under IRC section 168, effective_from: taxable years beginning on or after 2014-01-01, conditions: A taxpayer may choose to apply this section to taxable years beginning on or after January 1, 2012 (paragraph (j)(2)); Applies only where the taxpayer disposes of a portion of an asset and paragraph (d)(1) of this section applies to that disposition)

“The depreciation reserve of the asset must be reduced by the greater of the depreciation allowed or allowable for the disposed portion as of the end of the taxable year immediately preceding the year of disposition.”

Not established from an authoritative source.

Do the books and the return have to reach the same conclusion?

See A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance (as defined under section 1.162-4) to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation, if the taxpayer incurs these amounts in carrying on its trade or business and treats these amounts as capital expenditures on its books and records regularly used in computing income; a taxpayer that elects must apply the election to all amounts paid for repair and maintenance to tangible property that it treats as capital expenditures on its books and records in that taxable year.

Any amounts for which the paragraph (n) election is made shall not be treated as amounts paid for repair or maintenance under section 1.162-4. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers making the paragraph (n) election, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“Any amounts for which this election is made shall not be treated as amounts paid for repair or maintenance under § 1.162–4.”

A taxpayer may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property, but only to the extent those amounts are deducted by the taxpayer for financial accounting purposes or in keeping its books and records. (jurisdiction: United States (federal income tax), entity_scope: any person that pays or incurs amounts to acquire, produce or improve tangible real or personal property in a trade or business, accounting_basis: federal income tax; conformity with financial accounting / books and records treatment, effective_from: 2014-01-01, conditions: the amounts must be deducted by the taxpayer for financial accounting purposes or in keeping its books and records; the safe harbor applies only by election)

“Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records.”

Once a method of accounting has been adopted it may only be changed with the consent of the Commissioner; a change in method of accounting includes a change in an overall plan of accounting or a change in the treatment of any material item, and the treatment of a capital expenditure recovered through depreciation versus a current repair expense is given as an example of a material item. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers filing US federal income tax returns that hold tangible property used in a trade or business, accounting_basis: US federal income tax)

“Once a method of accounting has been adopted, it may only be changed with the consent of the Commissioner. A change in method of accounting includes a change in an overall plan of accounting (e.g., cash to accrual), or a change in the treatment of any material item. For accounting method purposes, a “material item” is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction. For example, the treatment of a capital expenditure, recovered through depreciation, versus a current repair expense is a material item.”

Not established from an authoritative source.

Required authority: primary regulator or government. Highest achieved: primary regulator or government.

What to keep to support the conclusion

See Among the examination considerations, examiners are directed to ask whether the taxpayer maintains a work order system for all capital expenditures and major repair jobs tracking all project costs.

In reviewing fixed asset studies conducted by or on behalf of the taxpayer, examiners are directed to ensure that project requests, purchase orders, invoices and related documents were reviewed as part of the study. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: IRS examiners reviewing a taxpayer's fixed asset study, accounting_basis: US federal income tax)

“Ensure that project requests, purchase orders, invoices, and related documents were reviewed as part of the study.”

The final tangible property regulations were issued in 2013 and taxpayers were required to correct any prior method changes to comply with them for tax years beginning on or after January 1, 2014; the burden of proof rests with the taxpayer, and taxpayers must maintain sufficient contemporaneous records. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers filing US federal income tax returns that hold tangible property used in a trade or business, accounting_basis: US federal income tax, effective_from: tax years beginning on or after 2014-01-01)

“The final regulations were issued in 2013. Taxpayers were required to correct any prior method changes to comply with these regulations for tax years beginning on or after January 1, 2014. The burden of proof rests with the taxpayer, and taxpayers must maintain sufficient contemporaneous records.”

In cases in which an expenditure is necessitated by normal wear and tear or damage to the unit of property that occurred during the taxpayer's use of it, whether the expenditure is for a betterment is determined by comparing the condition of the property immediately after the expenditure with the condition of the property immediately prior to the circumstances necessitating the expenditure. (jurisdiction: United States — federal income tax (26 CFR, Internal Revenue Code section 263(a)), entity_scope: taxpayers computing U.S. federal income tax, accounting_basis: U.S. federal income tax, effective_from: 2014-01-01, conditions: applies to taxable years beginning on or after January 1, 2014 (for paragraphs (h), (m) and (n), to amounts paid in taxable years beginning on or after January 1, 2014), per paragraph (r)(1); as printed in the CFR annual edition revised as of April 1, 2025)

“(iv) Appropriate comparison—(A) In general. In cases in which an expenditure is necessitated by normal wear and tear or damage to the unit of property that occurred during the taxpayer’s use of the unit of property, the determination of whether an expenditure is for the betterment of the unit of property is made by comparing the condition of the property immediately after the expenditure with the condition of the property immediately prior to the circumstances necessitating the expenditure.”

Not established from an authoritative source.

The records you are expected to keep with the asset

See The final tangible property regulations were issued in 2013 and taxpayers were required to correct any prior method changes to comply with them for tax years beginning on or after January 1, 2014; the burden of proof rests with the taxpayer, and taxpayers must maintain sufficient contemporaneous records.

Examiners are directed to consider the taxpayer's written policy for determining whether amounts paid result in an improvement or a repair. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: IRS examiners reviewing an improvement issue, accounting_basis: US federal income tax)

“Consider the taxpayer’s written policy for determining whether amounts paid result in an improvement or a repair.”

Taxpayers have always been required to keep records on their assets; the disposition regulations do not change the requirement to keep records on complete assets, and instead use a taxpayer's existing records on assets as a starting point while providing reasonable methods to identify and carve out parts of assets. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers holding MACRS property, accounting_basis: US federal income tax)

“While the partial disposition election is new, taxpayers have always been required to keep records on their assets. The regulations do not change the requirement to keep records on complete assets. The regulations use a taxpayer’s existing records on assets as a starting point and contain reasonable methods to identify and carve out parts of assets.”

The taxpayer's asset accounts and other records are the starting point for the examination of many issues including dispositions; the regulations do not change the records taxpayers must maintain for each asset account but refer to and incorporate the existing recordkeeping regulations — Section 1.167(a)-7(c) for multiple and single asset accounts and Section 1.168(i)-1(l)(3) for general asset accounts — which are in addition to the general books and records requirement of Section 6001 and the regulations thereunder. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers holding MACRS property, accounting_basis: US federal income tax)

“The taxpayer’s asset accounts, and other records are the starting point for the examination of many issues, including dispositions. The regulations do not change the records that taxpayers must maintain for each asset account. Rather, the regulations refer to and incorporate existing regulations containing the recordkeeping requirements for asset accounts. • Section 1.167(a)-7(c) provides the recordkeeping rules for MAAs and SAAs and Section 1.168(i)-1(l)(3) provides the recordkeeping rules for GAAs. These recordkeeping rules are in addition to the general books and records requirement of Section 6001 and the regulations thereunder.”

Partly established. Established: what documentation is expected to support a repair or capitalization conclusion (S54). Missing: the description of the work performed; how long that documentation must be retained alongside the asset record.

Correcting spending that was coded the wrong way

The page gives as an example that a taxpayer is changing its method of accounting if it has been capitalizing certain amounts characterized as improvements and would like to currently deduct those amounts as repairs and maintenance costs under the final tangibles regulations. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax)

“For example, you are changing your method of accounting if you have been capitalizing certain amounts that you characterized as improvements and would like to currently deduct the amounts as repairs and maintenance costs pursuant to the final tangibles regulations.”

Generally a taxpayer receives automatic consent to change a method of accounting by completing and filing Form 3115, Application for Change in Accounting Method, and including it with its timely filed original federal tax return for the year of change. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax)

“Generally, you receive automatic consent to change a method of accounting by completing and filing Form 3115, Application for Change in Accounting Method , and including it with your timely filed original federal tax return for the year of change.”

A taxpayer cannot file an amended return to make a change in method of accounting; the only exception the page states is a limited late filing provision in section 6.03(4) of Revenue Procedure 2015-13. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax)

“You cannot file an amended return to make the change in method of accounting. The only exception is a limited late filing provision found in section 6.03(4) of”

For a taxpayer that timely filed (including any extension) its original federal income tax return for the year of change, the limited late filing provision grants an automatic extension of 6 months from the due date (excluding any extension) of that return to file an amended return consistent with the taxpayer's changed method of accounting and including the original Form 3115. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax, conditions: taxpayer must have timely filed, including any extension, the original return for the year of change)

“These provisions grant, for a taxpayer who has timely filed (including any extension) its original federal income tax return for the year of change, an automatic extension of 6 months from the due date (excluding any extension) of the federal income tax return for the year of change to file an amended return in a manner that is consistent with the taxpayer's changed method of accounting and includes the original Form 3115.”

Partly established. Established: how to correct spending already coded the wrong way in a period whose return has already been filed (S65). Missing: how to correct spending already coded the wrong way in an open period; how to correct spending already coded the wrong way in a closed period.

Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: high quality professional secondary reference, primary regulator or government.

Changing a position already reported on a filed return

See Once a method of accounting has been adopted it may only be changed with the consent of the Commissioner; a change in method of accounting includes a change in an overall plan of accounting or a change in the treatment of any material item, and the treatment of a capital expenditure recovered through depreciation versus a current repair expense is given as an example of a material item.

A change to comply with § 1.162–4 is a change in method of accounting to which the provisions of sections 446 and 481 and the accompanying regulations apply. (jurisdiction: United States (federal income tax law; Internal Revenue Code and Treasury Regulations, 26 CFR part 1), entity_scope: Taxpayers changing to comply with § 1.162–4, accounting_basis: federal income tax, effective_from: 2014-01-01, conditions: Under § 1.162–4(c)(1) this section applies to taxable years beginning on or after January 1, 2014; under § 1.162–4(c)(2) a taxpayer may choose to apply it to taxable years beginning on or after January 1, 2012.; Text as it appears in the 26 CFR Ch. I edition revised as of April 1, 2025.)

“(b) Accounting method changes. A change to comply with this section is a change in method of accounting to which the provisions of sections 446 and 481 and the accompanying regulations apply.”

A taxpayer seeking to change to a method of accounting permitted in § 1.162–4 must secure the consent of the Commissioner in accordance with § 1.446–1(e) and must follow the administrative procedures issued under § 1.446–1. (jurisdiction: United States (federal income tax law; Internal Revenue Code and Treasury Regulations, 26 CFR part 1), entity_scope: Taxpayers seeking to change to a method of accounting permitted in § 1.162–4, accounting_basis: federal income tax, effective_from: 2014-01-01, conditions: Consent must be secured in accordance with § 1.446–1(e); the administrative procedures themselves are issued outside this section.; Under § 1.162–4(c)(1) this section applies to taxable years beginning on or after January 1, 2014; under § 1.162–4(c)(2) a taxpayer may choose to apply it to taxable years beginning on or after January 1, 2012.; Text as it appears in the 26 CFR Ch. I edition revised as of April 1, 2025.)

“A taxpayer seeking to change to a method of accounting permitted in this section must secure the consent of the Commissioner in accordance with § 1.446–1(e) and follow the administrative procedures issued under § 1.446–”

A taxpayer that is not in compliance, or otherwise wants to change its method of accounting to use the safe harbor for routine maintenance, should file Form 3115 and compute a section 481(a) adjustment. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax)

“If you are not in compliance or otherwise want to change your method of accounting to use the safe harbor for routine maintenance, you should file Form 3115, Application for Change in Accounting Method, and compute a section 481(a) adjustment.”

Partly established. Established: what federal tax rules require of a business that has already reported a repair or capitalization conclusion on a filed return and later determines the conclusion was wrong (S52); whether and by what route the reported position may be changed (S60). Missing: how that differs from correcting the treatment before the return is filed.