Immediate write-offs, whether labeled as repairs, maintenance or accelerated depreciation, are not much use to any mobile operator without taxable profits from which to deduct them. After all, very few businesses will actually benefit from more losses.
Capitalizing means treating the cost under the belief that benefits – including tax benefits – will be derived over the long run, whereas expensing a cost implies the benefits are short-lived. Whether an item is capitalized or expensed usually comes down to its useful life, which is described as the estimated amount of time over which that benefit is anticipated to be received). Who better to estimate it than the portable plant operator?
Many small businesses can elect to deduct the cost of what would otherwise be capital improvements as expenses. By expensing an expenditure, the operation ends up paying less tax because expenses are reported immediately (in the tax year when purchased).
Capitalizing has the opposite effect on the tax bill.
To qualify, the business must have had less than $10 million in average annual gross receipts for the three preceding tax years. To be eligible for the safe harbor, the total amount of repairs, maintenance and improvements for the year cannot exceed the lesser of $10,000 or 2 percent of the property’s unadjusted basis. If the total amount paid exceeds the safe harbor threshold, the safe harbor does not apply to any amounts during the tax year.
Follow the accountant
The tax rules allow a producer or contractor to follow the financial accounting policies when it comes to choosing to capitalize repair and maintenance expenses as improvements – so long as they are treated as such for accounting purposes.
The operation can choose to treat repair and maintenance costs paid during the tax year as amounts paid to improve property if:
• Those amounts were paid in carrying on a trade or business, and the amounts are treated as capital expenditures on the operation’s books and records.
• The election to capitalize is made for each taxable year in which qualifying amounts of repair and maintenance costs are a factor on the tax return.
Once again, this annual election is not a change in the method of accounting. It is the portable plant operator that has the discretion of determining if expenditures should be capitalized and depreciated over time or whether the cost should be fully expensed and deducted in the current tax year. The operation is not required to capitalize as an improvement and, therefore, may be permitted to immediately deduct the cost of work such as repairs, maintenance, improvements or similar costs.
Keeping in mind that some costs cannot be capitalized – such as maintenance plans and warranties, software licenses, training costs, operating supplies and consumables – even though they might appear to be part of the basic cost of an otherwise capitalizable asset.
Mark E. Battersby is a freelance writer who specializes in taxes and finance.