Repair vs Capitalization Studies

Find out if you can benefit from a Repair vs Capitalization Study



If you have renovated your building after owning it for at least one year, you could be eligible for significant deductions under the new 2014 Repair and Retirement rules. Please provide the following information to find out if you qualify for additional deductions.


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  Repair Regulations effective January 1, 2014

The IRS issued comprehensive regulations regarding the deduction and capitalization of expenditures related to tangible property that are applicable to businesses in all industries that acquire, produce, replace or improve tangible property. The regulations are commonly knowned as Repair Regulations or Tangible Property Regulations. Since the new regulations mostly affect real property, they can provide significant benefits even if a cost segregation study has already been performed. Application of the new repair regulations requires an in-depth understanding of various tax cases and “circumstances” that must be met.

IRS procedures allow you to apply these rules retroactively and claim any missed deductions using Form 3115. Correcting these errors is considered an Automatic Change of Accounting Method and does not require amending any returns.

  Who can Benefit from a Repair vs Capitalization Review

Generally, anyone that has incurred significant costs for renovations to their existing property in the last 15 years is an ideal candidate. The original improvements should be placed in service for at least one year before renovations occur. KBKG recommends a formal study if at least $500,000 or more is spent on renovations.

  Significant Changes to rules

Whether building expenditures are capital improvements or repair expenses.
The IRS outlines numerous subjective factors that must be considered when deciding if the building expenditure is an improvement or a repair expense. KBKG engineers will help you determine when it’s appropriate to expense things such as windows, roofs, HVAC, plumbing and electrical based on your unique situation.

Write-off structural components of buildings when retired or demolished.
Structural components of a building include items with a long tax life (generally 39, 27.5 or 15 years) such as lighting, roofs, HVAC systems, interior and exterior walls, etc. The new regulations allow you to assign a value to those items and write them off when replaced.

Case Study:
Winemart acquires an office building for $5M. Five years later they spend
$1M to remodel the second floor. KBKG engineers perform an Asset Retirement Study and identify $450,000 of 39 year life items that were removed during the remodel. This might include things like lighting, drywall, doors, floor coverings, acoustic ceilings, etc.

Results: $400,477 of additional deductions on current year return.


“Plan of Rehabilitation Doctrine” is now obsolete!
Under the old rules, you had to capitalize any routine repair work that was performed at the same time as other major improvements. If you did not expense repair work done in the past under the old regulations, you are now able to claim those missed deductions without amending tax returns.

Case Study:
Four years ago, Lexar capitalized all $4M of “renovation” costs to their building. KBKG engineers find that $300,000 was used to replace certain windows, asphalt patchwork, painting, roof tiles, some plumbing fixtures and one HVAC unit. KBKG determines all these costs are repair expenses.

Results: Filing Form 3115 and claiming an additional $266,985
of deductions on current year return.


KBKG can quickly review your tax depreciation schedule.
Fill out the form to see if you can benefit from a Repairs Study.
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