Is an Activity a Repair or an Improvement?

Improvements, which must be capitalized, fall into three categories.¹

  1. Betterment² – activity that contributes towards improving an asset’s performance and/or increasing its value.
  2. Restoration³ – activity that returns something to its original condition.
  3. Adaption4 to a new or different use – activity is if the adapted unit of property is not consistent with the taxpayer’s ordinary use of the unit when the unit was originally placed in service by the taxpayer.

If the activity does not fall into one of the three above categories, then the activity can be considered a repair which is expensed for the year.  However, if the activity is an improvement then the activity must be allocated over the appropriate years.

If you would like to learn more about this tax strategy, please call Susan at 847.895.9880.

¹ Treas. Reg. §1.263(a)-3(d)

² Treas. Reg. §1.263(a)-3(j)

³ Treas. Reg. §1.263(a)-3(k)

4 Treas. Reg. §1.263(a)-3(l)


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