Repairs Versus Improvements

When you fix or alter your business assets, you need to pay close attention to what you are doing.


You may have to delay your tax deductions depending on the extent and type of work you do to the asset.


If you merely repair your asset, you can deduct the expense in the tax year in which you incur the expense.


If you make improvements to the asset, you have to capitalize the expense. This means you cannot currently deduct the expense, and you may have to wait years to recover the full cost of the improvement.




A repair maintains an asset in its normal efficient operating condition.1


Improvements are investments that go beyond repairs. Tax law describes three types of improvements:



Betterment. You increase the property’s value, efficiency, strength, or quality.2



Restoration. You return the property to its ordinary condition after the property has fallen into a state of disrepair or after the completion of its class life.3



Adaptation to New Use. You convert your property into something different. For example, you adapt your warehouse to a new use if you convert it into a showroom for your products.4


Personal (Non-business) Assets


For business assets, you generally want repairs, not improvements. With repairs, you get your deductions sooner, which means more money in your pocket now instead of later.


The analysis flips when you consider personal assets. Since you cannot deduct personal expenses, repairs do not help you.


However, if you can capitalize your expense, you can add the cost to the basis of your asset.5 When you eventually sell the asset, you thereby reduce your capital gain by the cost of the improvement.



1    See Reg. Section 1.162-4(a) (defining “repair” as an expense that is not an improvement). See Reg. Section 1.263(a)-3(i) for safe harbor for routine maintenance.

2    Reg. Section 1.263(a)-3(j)(1). The regulation admits that repairs also increase the value, etc. of an asset. However, to determine the increase in value, you have to compare the condition of the property immediately after the expenditure with the condition of the property immediately prior to the circumstances necessitating the expenditure.

3    Reg. Section 1.263(a)-3(k).

4    Reg. Section 1.263(a)-3(l).

5    IRC 1016(a)(1).