When a five-figure commercial building expense hits your desk, the first question is simple: Can you deduct it, or must you depreciate it over 39 years?
Capital Improvement vs Repair: What’s the Difference?
Consider a recent example. An office building owner replaced a failed sliding glass door and frame. The total cost was $12,000, including removal and installation. The new unit was the same brand, size, and quality as the old one. There were no upgrades, no redesign, and no expansion.
When a Cost Becomes a Capital Improvement
Under the tax rules, some expenses must be capitalized. This applies if they result in a betterment, an adaptation to a new or different use, or a restoration—the so-called BAR tests. Replacing a door with one of the same type and quality, without improving the building overall, does not clearly meet the capitalization tests. In situations like this, therefore, the strongest technical position is often to deduct the full amount as a repair under Section 162 of the tax code.
However, conservative taxpayers may prefer to capitalize the cost. If you take that route, you must capitalize the entire $12,000—including installation—and depreciate it over 39 years. Importantly, the good news is: you may also elect a partial disposition and deduct the remaining basis of the old door, which can produce a meaningful current write-off.
Key Takeaway
The key takeaway? Not every expensive building cost is a capital improvement. The tax result depends on the nature and scope of the work—not on the price tag.
How We Can Help
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