CHAPTER 10
Repairs, Maintenance, and Energy Improvements
- Ordinary Repairs
- Rehabilitation Plans
- Small Business Safe Harbors
- Rotable Spare Parts
- Change in Accounting Method
- Special Rules for Improvements for the Elderly and Handicapped
- Lists of Deductible Repairs and Capital Improvements
- Energy Improvements
Property and equipment generally need constant repairs to keep them in working order. Preventative maintenance—regular servicing of equipment—can cut down on replacement costs by allowing you to keep your current equipment longer. When your computer goes down, a service person is required to make repairs. When the air-conditioning system in your office building stops working, again, servicing is necessary. If you have property or equipment to which you make repairs, you can deduct these expenses. The only hitch is making sure that the expenses are not capital expenditures. The cost of capital expenditures cannot be currently deducted but instead are added to the basis of property and recovered through depreciation or upon the disposition of the property.
For further information about deducting repairs, see IRS Publication 535, Business Expenses.
Ordinary Repairs
Deducting Incidental Repairs in General
The cost of repairing property and equipment used in your business is a deductible business expense. In contrast, expenditures that materially add to the value of the property, prolong its life, or adapt the property to a new or different use must be capitalized (added to the basis of the property and recovered through depreciation). In most cases, the distinction is clear. If you pay a repair person to service your copying machine because paper keeps getting jammed, the cost of the service call is a repair expense and is currently deductible. If you put a new roof on your office building, you usually must capitalize the expenditure and recover the cost through depreciation. Sometimes, however, the classification of an expense as a repair or a capital expenditure is not clear. For example, in one case the cost of a new roof was currently deductible where it was installed merely to repair a leak and did not change the structure of the building or add to its value.
Guidelines on Distinguishing Between a Repair and a Capital Item
Repairs are expenses designed to keep property in good working condition. This includes the replacement of short-lived parts. Typically, the cost of repairs is small compared with the cost of the property itself.
Capital items, on the other hand, are akin to original construction. Costs are usually substantial. Table 10.1 includes some common examples of repairs and capital improvements. Final regulations issued in 2013 contain many favorable safe harbors and de minimis rules that allow otherwise capitalized costs to be currently deductible.
Table 10.1 Examples of Repairs versus Capital Items
| Repairs | Capital Items |
| Painting the outside of office building | Vinyl siding the outside of office building |
| Replacing missing shingles on roof | Replacing entire roof unless strictly for repair purposes |
| Replacing compressor for air conditioner | Adding air-conditioning system |
| Cleaning canopy over restaurant entrance | Adding canopy over restaurant entrance |
| Resurfacing office floor | Replacing office floor |
Even though repairs add to the length of a property's useful life, this does not automatically make them capital improvements. It can be argued that all repairs produce this result. For example, one business owner with a fleet of tug boats made substantial engine repairs each year. The IRS said that the repairs should be capitalized because they added to the life of the boats, but the Tax Court said no. Despite the cost of the repairs—over $100,000 per tug—and the fact that the repairs kept the tugs afloat longer—they were still ordinary repairs that were currently deductible.
To distinguish repairs from capital improvements, there are no bright line tests; the determination is based on facts and circumstances. Capital improvements include a betterment to or restoration of the unit of property, or an adaptation of the unit of property to a new or different use. A “unit of property” is functionally interdependent on components such as a machine or a building. However, certain major building systems (e.g., HVAC, plumbing, and electrical) are treated as separate units of property. The cost (no matter how minor) of restoring property after a casualty loss is not a deductible repair cost if a casualty loss deduction is taken. For more guidance on determining a betterment, restoration, or adaption, see IRS questions and answers at www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations.
The cost of routine maintenance is currently deductible if it is done to keep property in its ordinarily efficient operating condition. This maintenance safe harbor rule applies to buildings as long as the owner expects to perform the maintenance more than once over a 10-year period. The safe harbor applies to property other than buildings if expected to be done more than once during the class life (essentially the recovery period for depreciation purposes) of the unit of property. However, you can elect to capitalize repair and maintenance costs for tangible personal property (not realty) if you treat the costs as such on your books and records. The election is made on your tax return (not on an amended return) and, once made, the costs become depreciable. For partnerships and S corporations, the election is made by the entity and not by the individual owners.
The fact that certain repairs are necessitated by governmental directives does not change the character of the expense. If it is a required repair, it is currently deductible; if it substantially improves the property, it is a capital expenditure. For example, in one case, rewiring ordered by local fire prevention inspectors was a capital expenditure. The same is true for capital expenditures ordered by the U.S. Public Health Service and state sanitary or health laws.
Special Rules
If things weren't confusing enough when differentiating repairs versus capital improvements, the IRS has created two special rules:
Repairs and remodeling of restaurants and retail establishments. Because these expenditures typically occur every 5 to 7 years, the IRS lets a business elect to treat 75% of the costs to remodel and refresh their premises as an ordinary repair cost which is currently deductible. The balance of 25% of such costs must be capitalized. A listing of qualified expenses can be found in Revenue Procedure 2015-56. However, this safe harbor currently applies only if a business has an applicable financial statement (AFS), which includes an SEC filing, an audited financial statement, or a filing with a government agency other than the SEC or IRS. Most small businesses don't have an AFS and cannot use this write-off option. However, the IRS may extend the remodel-refresh rule to small businesses in the future.
Routine maintenance safe harbor. This rule allows you to deduct certain repairs and maintenance that would otherwise have to be capitalized if such actions are reasonably expected to occur at least once every 10 years. The rule, which can be used by any business, is discussed later in this chapter.
Environmental Cleanup Costs
If you are forced to take certain actions to comply with Environmental Protection Agency (EPA) requirements, such as encapsulating or removing asbestos, understand which expenses are currently deductible and which expenses must be capitalized. Environmental remediation costs can be currently deducted. For instance, the cost of replacing mold-contaminated drywall in a nursing home was a deductible remediation cost that merely restored the building to its precontamination condition. The costs of cleanups to comply with environmental laws that effectively restore property to its original (precontamination) condition may be deductible. But the cost of capital improvements, even though required to comply with environmental laws, must be capitalized.
Small business refiners (those with no more than 1,500 individuals engaged in refinery activities on any day during the year and the average daily domestic refinery run for the one-year period ending on December 31, 2002, did not exceed 205,000 barrels) can elect to deduct 75% of costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the EPA.
Rehabilitation Plans
Past, there was a rehabilitation doctrine created by case law, which had required you to capitalize the cost of ordinary repairs incurred as part of a plan of rehabilitation, modernization, or improvement to property. The “repair regulations” make this doctrine obsolete.
However, if you improve property in a building by changing structural components (e.g., windows, HVAC units, or the roof), you are no longer required to continue depreciating the old component along with the new component. Instead, you can do either of the following (for details see Reg. §1.168(i)-8):
Continue depreciation under the old rule.
Make a partial disposition election. Under this option you take a current deduction for the remaining undepreciated basis of the old component. The cost of the new component is then subject to depreciation (even if it could have been treated as a currently deductible repair). The election must be made on a timely filed return for the year of the replacement.
Tax Credits for Rehabilitation
While rehabilitation costs generally must be capitalized, in special instances you can claim a tax credit for your expenditures. If you rehabilitate a nonresidential building that was placed in service before 1936, you can claim a credit for 10% of your expenditures. If you rehabilitate a certified historic structure (a building that is listed in the National Register or located in a registered historic district), the credit is 20% of costs. The credit is claimed in the year the property is placed in service, not the year in which the expenditures are made.
Rehabilitation requires that you make substantial improvements to the building but leave a substantial portion of it intact. A substantial portion means that within any 2-year period you select, the rehabilitation expenditures exceed the adjusted basis of the building or $5,000, whichever is greater. In the case of a pre-1936 building, at least 75% of the external walls must be left intact and at least 50% of external walls must remain as external walls. The Secretary of the Interior must certify that the rehabilitation of certified historic structures will be in keeping with the building's historic status.
The credit is claimed on Form 3468, Investment Credit. For individuals and C corporations, it is part of the general business credit computed on Form 3800, General Business Credit. The credit may be limited by the passive loss rules explained in Chapter 4. The general business credit limitations are explained in Chapter 23.
Demolition and Removal Expenses
As a general rule, the costs of demolishing a building are not deductible. Instead, they are added to the basis of the new building (that is, the building put up in the place of the demolished building). However, the costs of demolishing only a part of a building may be currently deductible. According to the IRS, if 75% or more of the existing external walls and 75% or more of the existing internal framework are both retained, the costs of demolition need not be capitalized (added to basis) but instead can be currently deducted.
Removal costs for tangible personal property (not realty) being disposed of are currently deductible if you do not realize gain or loss on the disposition.
Small Business Safe Harbors
Under the repair regulations discussed earlier in this chapter are some safe harbors specifically for small businesses. These safe harbors allow for immediate write-offs in special situations. They are intended to alleviate recordkeeping, but this does not mean you can forego recordkeeping entirely; you still need records.
Small Building Safe Harbor
Usually, building improvements must be capitalized and their cost recovered through depreciation. However, small taxpayers can write-off certain costs.
To be eligible for this safe harbor:
You must be a “small taxpayer.” This means having average annual gross receipts in the 3 prior years of no more than $10 million. There is no aggregation rule here, so if you own multiple businesses, you don't have to aggregate your gross receipts; each business stands on its own.
The unadjusted basis of the building is no greater than $1 million. Unadjusted basis usually is the original cost of the building, exclusive of the land.
The safe harbor applies only if your repairs, maintenance, and improvements for the year do not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building. The IRS has the authority to adjust the $10,000, 2%, and $1 million amounts in the future.
The safe harbor applies separately to each such building owned by a small taxpayer. Thus, if you are a small taxpayer, you may qualify to use the safe harbor on one building but not for another, depending on the extent of your costs for the year.
The election to use this safe harbor must be made on an annual basis by attaching a statement to the income tax return indicating that it is a small taxpayer safe harbor election. Details about the statement are at the end of this chapter. There is no special IRS form for this election. The election must be made on a timely filed original return (not an amended return) for the year of the election. For pass-through entities, the election is made by the entities and not by the owners on their personal returns.
Routine Maintenance Safe Harbor
Even though certain maintenance costs should be treated as capital improvements, you can immediately deduct the cost if you qualify under this safe harbor. The write-off applies only to routine maintenance costs, which are recurring activities to keep a building or each system in the building in ordinarily efficient operating condition. Recurring work means activities reasonably expected to be performed more than once every 10 years. Activities that are routine maintenance are:
Inspection, cleaning, and testing the building's structure or a system within the building
Replacement of damaged or worn parts with comparable and commercially available replacement parts
This election is treated as a change of accounting method. It is not made by filing an annual election statement. Usually you need to file Form 3115. See Chapter 2 for more details about changes in accounting methods and simplified procedures for certain changes.
Rotable Spare Parts
Rotable spare parts are materials and supplies acquired for installation on a unit of property that are removable from the unit of property and then repaired or improved and either reinstalled on the same unit or stored for later installation. There are 3 ways to handle rotable spare parts for tax purposes:
Deduct the cost in the year the parts are disposed of
Elect to capitalize the cost of the parts and recover the cost over the applicable recovery period (see Chapter 14)
Use the optional method, a description of which follows
There are a lot of moving parts, as it were, to the optional method. Under the optional method for rotable spare parts, you deduct the cost to produce or acquire them upon initial installation and recognize as income the fair market value of the part (plus the cost to remove it) when removed from the unit. You add to the basis of the part any amount paid to repair, maintain, or improve it. You deduct the cost of reinstallation and any basis not previously deducted in the year in which the part is reinstalled. Finally, you deduct any remaining amount in the year in which the part is finally disposed of.
Different rules apply to temporary spare parts and standby emergency spare parts. Temporary spare parts are parts used temporarily until new or repaired parts can be installed. Temporary spare parts are then stored for use at a later time. Temporary spare parts can be written off under any of the three methods applicable to rotable spare parts.
Standby emergency spare parts have a rather lengthy definition; all 10 conditions must be satisfied. An emergency spare part is an item:
Acquired when particular machinery or equipment is acquired (or later acquired and set aside for use in particular machinery or equipment);
Set aside for use as replacements to avoid substantial operational time loss caused by emergencies due to particular machinery or equipment failure;
Located at or near the site of the installed related machinery or equipment so as to be readily available when needed;
Directly related to the particular machinery or piece of equipment they serve;
Normally expensive;
Only available on special order and not readily available from a vendor or manufacturer;
Not subject to normal periodic replacement;
Not interchangeable in other machines or equipment;
Not acquired in quantity (generally only one is on hand for each piece of machinery or equipment); and
Not repaired and reused.
Standby spare parts can be deducted using either of the first two methods applicable to rotable spare parts. The optional method cannot be used for standby spare parts.
Change in Accounting Method
Switching from one method of handling the cost of rotable, temporary, or emergency spare parts may be a change in accounting method. For example, switching to the optional method for rotable spare parts is a change in accounting method. For more information about making a change in accounting method, see Chapter 2.
Special Rules for Improvements for the Elderly and Handicapped
The Americans with Disabilities Act (ADA) may require you to make certain modifications to your office, store, or factory if you have not done so already. You may have to install ramps, widen doorways and lavatories to accommodate wheelchairs, add elevators, or make other similar changes to your facilities to render them more accessible to the elderly and handicapped.
These modifications may be more in the nature of capital improvements than repairs. Still, the law provides two special tax incentives to which you may be entitled. One is a tax credit; the other is a special deduction. These incentives allow for a current benefit rather than requiring capitalization of expenditures that will be recovered over long periods of time.
Disabled Access Credit
Small business owners can claim a tax credit for expenditures to remove barriers on business property that impede the access of handicapped individuals and to supply special materials or assistance to visually or hearing-impaired persons.
The credit cannot exceed 50% of expenditures between $250 and $10,250. The maximum credit is $5,000.
The dollar limit applies at both the partner and partnership levels. The same rule applies to shareholders and S corporations, as well as to members and LLCs.
Qualifying Expenditures
Qualifying expenditures are designed to meet the requirements of the ADA. For example, the cost of putting in handicapped parking spaces as required by federal law is a qualified expenditure. Many of these requirements are set forth in connection with the expense deduction for the removal of architectural and transportation barriers. However, eligible expenditures do not include those in connection with new construction. Thus, if you are in the process of building an office complex and you install special bathroom facilities to accommodate a wheelchair, you cannot claim the credit because this is new construction. If you claim the credit, you cannot also claim a deduction for the same expenditures. Businesses already in compliance with the ADA cannot claim the credit for equipment that may add some benefit for handicapped customers. Also, the IRS has ruled that Web-based businesses using software to enable handicapped customers to shop cannot claim the credit; it is limited to bricks-and-mortar businesses. However, a company with a physical place of business that uses a software service to communicate on-site with hearing-impaired customers qualifies for the credit.
Deduction for Removal of Architectural or Transportation Barriers
As you have seen throughout this chapter, expenditures that improve or prolong the life of property generally must be capitalized and the cost recovered through depreciation. You have already seen two special credits that can be claimed for expenditures that would otherwise have to be capitalized. There is one more important exception to this capitalization rule: You can elect to deduct the expenses of removing architectural or transportation barriers to the handicapped and elderly. The election is made simply by claiming the deduction on a timely filed tax return.
The maximum deduction in any one year is $15,000. If your expenditures for a removal project exceed this limit, you can deduct the first $15,000 of costs and capitalize (and then depreciate) the balance.
The dollar limit applies at both the partner and partnership levels. A partner must combine his or her distributive share of these expenditures from one partnership with any distributive share of such expenditures from any other partnership. The partner may allocate the $15,000 limit among his or her own expenditures and the partner's distributive share of partnership expenditures in any manner. If the allocation results in all or a portion of the partner's distributive share of partnership's expenditures not being an allocable deduction, then the partnership can capitalize the unallowable portion.
While the regulations on applying the dollar limits at both the partner and partnership levels do not specify other pass-through entities, presumably the same rules that apply to partners and partnerships apply as well to shareholders and S corporations.
If the election is made to expense these expenditures, then no disabled access credit can be claimed for the same expenses.
Qualifying Expenditures
These are expenses that conform a facility or public transportation vehicle to certain standards that make them accessible to persons over the age of 65 or those with physical or mental disability or impairment (see Table 10.2). It does not include any expense for the construction or comprehensive renovation of a facility or public transportation vehicle or the normal replacement of depreciable property.
Table 10.2 Guidance on Acceptable Standards for the Elderly and Handicapped
| Type of Expense | Requirements |
| Grading | The ground should be graded to attain a level with a normal entrance to make the facility accessible to individuals with physical disabilities. |
| Walks | A public walk should be at least 48″ wide and have a gradient of no more than 5%. |
| A walkway should have a continuing common surface (not interrupted by steps or abrupt changes in level). | |
| A walkway or driveway should have a nonslip surface. | |
| Parking lots | At least 1 space that is accessible and proximate to the facility must be set aside and designated for the handicapped. |
| The space must be open to 1 side to allow wheelchair access. | |
| For head-on parking, the space must be at least 12′ wide. | |
| Ramps | A ramp should not have a slope greater than a 1′′ rise in 12″. |
There must be a handrail 32″ in height. A ramp should have a nonslip surface. |
|
| A ramp should have a level surface at the top and bottom (if a door swings into the platform, the platform should be at least 5′ by 5′). | |
| A ramp should have level platforms at least every 30′. | |
| A curb ramp should be provided at every intersection (the ramp should be 4′ wide, with transition between 2 surfaces and a nonslip surface). | |
| Entrances | A building should have at least 1 primary entrance wheelchair accessible and on a level accessible to an elevator. |
| Doors and doorways | A door should have an opening of at least 32″. |
| The floor inside and outside the doorway should be level for at least 51″. | |
| The threshold should be level with the floor. | |
| The door closer should not impair the use of the door by someone who is handicapped. | |
| Stairs | Stairs should have handrails at least 32″ from the tread at the face of the riser. |
| Steps should not have risers exceeding 7″. | |
| Floors | Floors should have a nonslip surface. |
| Toilet rooms | The rooms should provide wheelchair access. At least 1 stall should be 66″ wide by 60″ deep, with 32″ door space and handrails. |
| Water fountains | A water fountain or cooler should have up-front spouts and hand and foot controls. |
| A water fountain should not be in an alcove unless there is 36″ of space. | |
| Public telephones | Each phone should be placed so the dial and headset can be reached by someone in a wheelchair. |
| Coin slots should not be more than 48″ from the floor. | |
| Public phones should be equipped for those with hearing impairments. | |
| Elevators | An elevator should be on entry levels of buildings and in all areas normally used. |
Cab size should allow a wheelchair to turn. The door opening should be at least 32″. |
|
| Controls | Switches and controls for all essential uses (light, heat, ventilation, windows, draperies, and fire alarms) should be within reach of a person in a wheelchair (no higher than 48″ from the floor). |
| Identification | Raised letters or numbers should be used to identify rooms (letters or numbers placed on the left or right of the door at a height of 54″ to 66″). |
| Warning signals | A visual beaming signal should be accompanied by an audible sound for the benefit of the blind. |
| Hazards | Hanging signs, ceiling lights, and similar objects and fixtures should be placed at a minimum height of 7′ (measured from the floor). |
| International | Wheelchair-accessible entrances should be identified with the accessibility symbol. |
Recordkeeping
If you elect to deduct these expenditures, you must maintain records and documentation, including architectural plans and blueprints, contracts, and building permits to support your claims. How long these records should be kept is discussed in Chapter 3.
Lists of Deductible Repairs and Capital Improvements
Over the years, various expenditures have come under review by the IRS and the courts. The following lists, one of deductible repairs and the other of improvements that must be capitalized, are based on actual cases and rulings. However, some previously classified improvements listed below may be currently deductible under safe harbor rules described earlier in this chapter.
Deductible Repairs
Altering building for street-widening program
Caulking seams
Replacing compressor for air conditioner
Replacing copper sheeting for cornice (blown off by wind)
Relining basement walls and floors with cement
Cleaning a restaurant canopy
Cutting and filling cracks in storage tanks
Tuck pointing and cleaning exterior brick walls
Adding timbers to support walkway over basement
Mending plaster walls and ceilings
Painting walls and ceiling over basement
Papering walls
Patching a leaking roof
Relocating steam pipes and radiators
Resurfacing floors
Repairing sidewalks
Shoring up building foundation
Replacing retaining walls
Repairing gutters
Capital Improvements
Installing new doors
Installing new windows
Replacing a coal burner with an oil burner heating system
Installing skylights
Installing fire escapes
Replacing a roof
Adding new floor supports
Replacing iron piping with brass piping in hot water system
Raising, lowering, or building new floors
Erecting permanent partitions
Installing fire sprinklers
Bricking up windows
Installing an air-conditioning system
Installing a ventilation system
Rewiring or upgrading electrical service
Replacing windows and doors
Expanding a building (building an addition)
Installing a burglar alarm system
Blacktopping a driveway
Improving a storefront
Adding new plumbing fixtures
Constructing a drainage system
Energy Improvements
Usually, capital improvements to a building must be recovered through depreciation, as explained earlier in this chapter. However, certain energy improvements to commercial realty can be immediately deducted. For example, some of the cost of adding insulation to the walls and attic of a commercial building may be deductible.
Commercial Buildings
The deduction applies to property installed in a building as part of the interior lighting system; heating, cooling, ventilation, and hot water systems; or the building envelope as part of a plan to reduce annual energy and power costs by 50% or more in comparison with a reference building meeting Standard 90.1-2007. Standard 90.1-2007 refers to standards of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America.
The deduction is $1.80 per square foot for a 50% energy savings target or 60¢ per square foot for a 16% energy savings target. A reduced deduction can be claimed in certain situations. The basis of the building must be reduced by the amount of any such deduction.
To claim the deduction, you must obtain certification for your improvements from a field inspection conducted by a licensed engineer or contractor.
Note: The deduction for energy-efficient commercial buildings expires at the end of 2016 unless Congress extends it. See the Supplement for any update.
Alternative Fuel Vehicle Refueling Property Credit
If you install certain refueling property for your business, you may claim a credit of up to $30,000. Refueling property is property for the storage or dispensing of a clean-burning fuel or electricity into the fuel tank or battery of a motor vehicle propelled by such fuel or electricity. The original use of the property must begin with you.
Clean-burning fuel is any fuel with at least 85% of the volume consisting of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen. In addition, any mixture of biodiesel and diesel fuel, determined without regard to any use of kerosene and containing at least 20% biodiesel, qualifies as a clean fuel.
The credit is part of the general business credit (see Chapter 23). If you use the credit, you must reduce the basis of the property by the amount of the credit (i.e., you figure depreciation on the adjusted basis). You cannot claim the credit if you elect the Section 179 deduction or if the property is used outside the United States.
Note: The credit for alternative fuel vehicle refueling property expires at the end of 2016 unless Congress extends it. See the Supplement for any update.
Other Business Energy Improvements
There is an energy tax credit for a specified percentage of the basis of each qualified energy property placed in service. Qualified energy property includes solar property, geothermal property, qualified fuel cell property or stationary microturbine property, combined health and power system property, qualified small wind energy property, and geothermal heat pumps. For example, the credit is 30% of the basis (generally cost) of qualified small wind energy property used to generate electricity.
The basis of the property for purposes of depreciation must be reduced by the credit. The basis of the property is not reduced for energy property financed by subsidized energy financing or industrial development bonds.
Employees
An employee can deduct repair costs as an itemized employee business expense on Schedule A, subject to the 2%-of-AGI rule discussed in Chapter 1.
Self-Employed
Repair costs are deductible on Schedule C. This schedule contains a line specifically for repairs and maintenance. Repair costs can also be deducted on Schedule C-EZ if total business expenses do not exceed $5,000. Farmers who are self-employed deduct repair costs on Schedule F.
Partnerships and LLCs
Repair costs are trade or business expenses that are taken into account in determining the profit (or loss) of the partnership or LLC on Form 1065. There is a specific line for deducting repair and maintenance costs. They are not separately stated items passed through to partners and members. Therefore partners and members in LLCs report their net income or loss from the business on Schedule E; they do not deduct repair costs on their individual tax returns.
An exception applies to expenditures for the removal of architectural and transportation barriers to the elderly and handicapped that are elected to be expensed. These items must be separately stated, since dollar limits apply at both the owner and entity levels.
S Corporations
Repair costs are trade or business expenses that are taken into account in determining the profit (or loss) of the S corporation on Form 1120S. There is a specific line for deducting repair and maintenance costs. They are not separately stated items passed through to shareholders. Therefore shareholders report their net income or loss from the business on Schedule E; they do not deduct repair costs on their individual tax returns.
An exception applies to expenditures for the removal of architectural and transportation barriers to the elderly and handicapped that are elected to be expensed. These items must be separately stated, since dollar limits apply at both the owner and entity levels.
C Corporations
Repair costs are trade or business expenses that are taken into account in determining the profit (or loss) of the C corporation on Form 1120. This form contains a separate line for deducting repairs and maintenance costs. Shareholders do not report any income (or loss) from the corporation.
Rehabilitation Credit for All Taxpayers
This credit is computed on Form 3468, Investment Tax Credit. It is part of the general business credit and is subject to the limitations on the general business credit (explained in Chapter 23), which is computed on Form 3800, General Business Credit, filed with Form 1040 and Form 1120. (Partners and S corporation shareholders figure the general business credit limitation on their individual returns.)
Disabled Access Tax Credit for All Taxpayers
This credit is computed on Form 8826, Disabled Access Credit. It is part of the general business credit and is subject to the limitations on the general business credit, which is computed on Form 3800, General Business Credit, filed with Forms 1040 and 1120. (Partners and S corporation shareholders figure the general business credit limitation on their individual returns.)
Energy Credit for All Taxpayers
The energy credit, which is part of the investment credit, is claimed in Part II of Form 3468, Investment Credit. It is part of the general business credit, which is computed on Form 3800, General Business Credit, filed with Forms 1040 and 1120. (Partner and S corporation shareholders figure the general business credit limitation on their individual returns.)
Small Building Safe Harbor Election for All Taxpayers
If you are eligible for this safe harbor and want to elect it, you must attach your own statement to your return each year you want the election to apply. The statement must include:
Your name
Your address
Your EIN
A description of the property and its unadjusted basis
A description of the costs for the year
A statement that you qualify for the safe harbor. Make reference to Reg. §1.263(a)-3(h)(1).