Potential Tax Deductions Through Tangible Property Safe Harbors

Has your business made repairs (true repairs, not improvements) to tangible property (buildings, machinery, equipment, vehicles, etc)? If so, you might qualify for a deduction on your 2014 income tax return.

Surprisingly, it can be a difficult task to determine when an activity is a repair and when it’s an improvement. Generally, the costs to improve tangible property are depreciated over a period of years, but repairs and maintenance can immediately be expensed and deducted. Most taxpayers prefer the option to immediately deduct the expenses rather than having to recognize the tax benefit over an extended period of years. IRS regulations have traditionally been very strict about the definition and rules regarding improvements. The good news for small businesses is they may be able to find some relief under the routine maintenance and small business safe harbor.

Routine maintenance safe harbor

Mainly applicable to residential landlords, the routine maintenance safe harbor provides the opportunity to expense routine maintenance activities as deductible in a single year, even if they would otherwise qualify as capital improvements that would be depreciated. Only routine maintenance activities designed to keep the entire building or systems in the building in operating capacity qualify. The IRS defines routine maintenance as inspection, cleaning and testing of the building structure and related systems. It also includes replacement of damaged parts with comparable replacement parts.


It’s important to note that there are significant limitations on when the safe harbor may be used. Since it should only be used for routine maintenance, major renovations such as remodeling, redesigns or building restorations do not qualify. In addition, items such as an entire roof replacement or enhancing HVAC systems are also exempt.

Small business safe harbor

This safe harbor is designed for small businesses with buildings that initially cost $1 million or less. Under this program qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. The IRS defines a qualifying small business as one with gross receipts of $10M or less per tax year.

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There are new opportunities for landlords to realize immediate tax savings for qualifying expenses. If you have questions about how you may be able to leverage these safe harbor programs, contact JLK Rosenberger today! For additional information call us at 949-860-9902,or click here to email us.


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