If your business made repairs to tangible property last year, such as machinery, buildings, equipment, or vehicles, you may be eligible for a useful deduction on your 2016 income tax return. But you must validate they were “repairs,” and not “improvements.”

Costs incurred from improving tangible property must be depreciated over a period of years, but costs incurred from incidental repairs and maintenance can be immediately expensed and deducted. Learn more about tangible property regulations details below.

What is Considered an “Improvement”?
A cost that results from an improvement to a building structure or any of its building systems or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the property.

Under the “improvement test,” you must capitalize amounts paid for work that is reasonably expected to substantially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you must capitalize amounts paid to adapt a unit of property to a new or different use.

2 Safe Harbors for Tangible Property
Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

  1. Routine maintenance safe harbor. You can expense routine activities to keep the property in efficient operating condition. These are activities that your business would be expected to perform more than once during the property’s “class life,” as defined by the IRS. However, you do not have to capitalize amounts incurred for activities outside the safe harbor. These amounts are subject to analysis under the general rules for improvements.
  2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses can deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business usually has gross receipts of $10 million or less.

In addition, there is also a de minimis safe harbor and an exemption for materials and supplies up to a certain threshold. Contact your advisor for details on these safe harbors and exemptions and other details on these safe harbors and exemptions to fully maximize your tangible property deductions.