If a taxpayer improves depreciable property, he or she must treat the improvement as
a separate depreciable property. Improvement means an addition to or partial replace-
ment of property that results in a betterment of the unit of property, restores the unit of
property, or adapts the unit of property to a new use. The costs of improvements must be
capitalized and then depreciated over a certain number of years.
Incidental repairs and maintenance of property are not capital expenditures. A taxpayer
can generally deduct the cost of repairing business property in the same way as any other
business expense. If a repair is made during the year, that expense is deducted in the year
paid. However, if a repair or replacement is considered a betterment, restoration, or ad-
aptation, it must be treated as an improvement and depreciated over a recovery period.
Some common examples of what constitutes repairs and improvements are listed in the
New Repair Regulations
In September 2013, the IRS issued final regulations to clarify the difference between cap-
ital improvements and repairs. The final regulations apply to taxable years beginning
January 1, 2014. However, taxpayers may elect certain rules to be effective for tax years
beginning January 1, 2012. (TD 9636)
Unit of property. Under prior regulations, the unit of property for a building consisted
of the building and its structural components as one whole property. The new regulations
separate buildings into eight components. [Reg. §1.263(a)-3(e)(2)(ii)(B)] • Heating and air conditioning.
• Electrical system.
• Fire protection system.
• Gas distribution system.
• Security system.
Materials and Supplies
Materials and supplies are deductible in the year first used in the taxpayer’s trade or
business. Materials and supplies are non-inventory items purchased to repair, maintain,
or improve a unit of property and include the following items. [Reg. §1.162-3(c)(1)] • Components acquired to maintain, repair, or improve a unit of tangible property that
are not acquired as part of a unit of property.
• Fuel, lubricants, water, and similar items that are reasonably expected to be consumed
in 12 months or less.
• A unit of property with an economic useful life of 12 months or less.
• A unit of property with an acquisition or production cost of $200 or less.
• Rotable spare parts acquired for installation on a unit of property, removable from
that property, generally repaired or improved, and reinstalled on the same or other
• Standby emergency spare parts acquired when machinery or equipment is acquired
and set aside for use as replacements.
Election to capitalize certain materials and supplies. Taxpayers may elect to capitalize
and depreciate amounts paid for only rotable, temporary, or standby emergency spare
parts. This election can be revoked by filing a request for a letter ruling and obtaining the
consent of the IRS.
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