2023 Marcum Year-End Tax Guide

73

THE MARCUM YEAR-END TAX GUIDE 2023

improvement property over 15 years, commercial building property over 39 years, among others). While fixed assets are required to be capitalized, certain charges for repairs and maintenance can be expensed as incurred. The tangible property regulations (TPRs) updated the requirements for determining capitalization or expensing an expenditure.

In deciding whether an expenditure should be capitalized, it is essential to consider whether it was a betterment, restoration, or adaptation of the property. The following are a few examples of items to consider when differentiating between routine repairs and maintenance and major renovations (betterment/restoration/ adaptation):

A careful review of a taxpayer’s fixed asset listing could identify previously capitalized assets that could be classified as repairs. A cost segregation study could further identify beneficial method changes. Such studies are typically used for real estate purchases. When a taxpayer purchases a building, the building is capitalized

as an asset and depreciated over 27.5 years for residential or 39 years for commercial property. However, a cost segregation study reviews the various building aspects to assign costs to shorter-lived assets, such as fixtures, equipment, and

communications systems. Not only can these items have a shorter depreciation life, but they may also be eligible for bonus depreciation, enhancing the initial year deductions available for taxpayers.

PREPAID EXPENSES Under income tax accounting rules, expenses are considered deductible when economic performance has occurred. When a company pre-pays for expenses, these expenditures are reported as an asset on the