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Expense or Capitalize?

I have read through the recent thread regarding roofs and am still musing about my situation. I am dealing with a building built in 1902 that houses commercial spaces on the ground floor and apartments on the two upper floors. Electrical was upgraded to 110 in 1945. Everything has been in working order but the insurance company has demanded that the electrical now be brought up to current code at least as far as the kitchens. About half of the work was done in

2006 & progress payments of $48,000+ (@ another $30,000 to go) were made. I was planning to capitalize until I saw the discussion here & am wondering if there is any justification for expensing this work. Also, if capitalizing is the answer, is it possible to depreciate each progress payment? The contractors are working during the day, inconveniencing the business as little as possible and the apartments are all in working order each evening, As each part is completed a progress payment is made. Obviously, we would like to expense as much as possible in 2006. The building is the only asset in a bypass trust and there really isn't any cashflow during this project to give the beneficiaries their income this year (they agree) so there will be tax at the trust level which will be less than the beneficiaries would be getting. Next project is to retrofit the facade for earthquakes as being demanded by the city . . . Thanks for any input on this! ~ Barbara

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Reply to
Barbara
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This sounds like an improvement and should be capitalized. Remember, the basic rule is that you capitalize anything which adds to the value or extends the life of the asset. Expenses are things which merely restore the value or life to a condition that existed before.

In this case, you are both adding to the value (a buyer would obviously pay more for a building with wiring up to standard) and extending the life. You are not restoring value or life because they did not previously exist.

You will have to wait until the project is complete before starting depreciation. That's when, officially, you put the new wiring in service.

Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

This sounds like an improvement and should be capitalized. Remember, the basic rule is that you capitalize anything which adds to the value or extends the life of the asset. Expenses are things which merely restore the value or life to a condition that existed before. In this case, you are both adding to the value (a buyer would obviously pay more for a building with wiring up to standard) and extending the life. You are not restoring value or life because they did not previously exist. You will have to wait until the project is complete before starting depreciation. That's when, officially, you put the new wiring in service. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

I agree it gets capitalized and depreciated, but it seems that it's being "placed in service" as the work progresses. So it's possible (but messy) to start depreciation as payments are made on most if not all of the work. My thoughts would be totally different if the building were unoccupied.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Reply to
Paul Thomas, CPA

Can "is up to code" be considered a "condition that existed before"? The wiring *was* up to code in 1946. Seth

Reply to
Seth Breidbart

What I am about to write is 'completely off-the-wall" and unless you can find a Circular 230 tax profesional to look it up and sign off on it, don't use it.

This is an involuntary upgrade of an existing building system that has not failed. If there is an ordinance that requires you to have fire insurance in order to rent the building, then the property is not rentable without the upgrade. Thus, this may be ~similar~ to the expensing of a new roof by the Tax Court. Some professionals think the Tax Court got that one wrong, but I have not read anything about the IRS appealing that decision.

If the above is not delusionery, it might be worth capitalizing, filing your return, and then filing an amended return where you expense. Keep in mind I do not prepare tax returns, not even my own.

Dick

Reply to
Dick Adams

I appreciate all the answers. It is true that the insurance company will cancel if this work is not done. The first thing done was to replace the PG&E line from the street to the building. 15 amp fuse boxes are being replaced by circuit breakers and wiring to the kitchens (but not the rest of the apartments) is being replaced. There will be a circuit breaker box outside each unit as wellas a main one. Work on tge main breaker room benind one of the stores was held up until the heritage people approved the door! Noone is vacating while the work is being done. Thanks again for all the opinions. ~ Barbara

Reply to
Barbara

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