What Bookkeepers should know about the new Repair & Capitalization Regs

What Bookkeepers should know about the new Repair & Capitalization Regs

January 10, 2014

What Bookkeepers Need to Know for the New Repair Regs.

Starting 1-1-14, your job has just become more difficult as you will need to look at the detail of invoices in order to know how to classify the company’s repairs.  In your bookkeeping, you now need 2 new materials & supplies categories, 2 specific ways to categorize repairs of vehicles & equipment, & new repair categories for buildings with up to 9 subcategories.

Material & Supplies (non-inventory & not Cost of Goods Sold):

1.  Classify as Materials & Supplies any non-inventory item that either a) costs less than $200 OR b) is expected to be used within 12 months.  For the most part, nothing has changed here for you. 

2.  But if the business buys, for example, a 2 year supply of propane for your forklift, costing over $200 – then you need to capitalize it.  That means you have to classify it as an asset instead of an expense account.  This would also include those expensive tools that you buy that you expect to last more than 12 months.    If you have these, we suggest setting up two asset accounts:

a.  “Materials  & Supplies - over 12 month supply” (In QuickBooks, this is a Fixed Asset)

b.  “Tools lasting over 12 months” (In QuickBooks, this is a Fixed Asset)

Repair & Maintenance - Equipment:

1. Classify as “Repairs & Maintenance – Equip.”  equipment repairs that cost less than $500. 

2.  If the equipment cost more than $500, then you have to ask three questions.  Did the repair restore a non-functioning asset to use (like a transmission on a car)?  Did the repair change the way that the asset was used?  Did the repair make the equipment better than it was to start with (you restore used equipment you purchased to its original condition)?  .  If the answer to all three questions is no, then you can classify it as “Repairs & Maintenance – Equip.”   If you answered yes, to any of these questions, you cannot classify it as a repair.  You must pick it up as an asset.  If it’s a vehicle repair, you must classify it as if you purchased a vehicle.  If it’s an equipment repair, you must classify it as if you purchased a piece of equipment.  Please make sure you note in your bookkeeping what equipment (or vehicle) was affected.

We suggest setting up the following accounts (if you don’t already have them set up):

                Repair “Expense” Accounts:

                a.  “Repairs  – Equip.”

                b.  “Repairs  – Vehicles.”

                Repair “Fixed Asset” Accounts:

                a.  “Equipment Purchased & Major Repairs”

                b.  “Vehicles Purchased & Major Repairs”

Repair & Maintenance to Building by Renters (Self-renters too):

The new regs are more simplistic for renters than owners of buildings.  If you rent the building that you use for your business, you can deduct repairs if: 1) the repair is not something that “restores” or “betters” the property and 2) you expect to make the same repair in less than 10 years.  An example of this would be carpeting as it’s not something that normally lasts 10 years.  But if you expect the repair to last more than 10 years – like with tile, or a hot water heater - then it must be written off over 39 years.  These are repairs to the building & its components (hot water heater, A/C etc.).  These long lasting repairs go into a fixed asset account called:    “Leasehold Improvements” (in QuickBooks this is a Fixed Asset)  Short term repairs go into “Repairs to Building & Components” (In QuickBooks this is an expense).

Repair & Maintenance to Building by Owners (including Landlords):

For building owners, this is the hardest type of repair to categorize.  First of all, we’re talking about repairs to the building & its 8 components.  That would be the building structure, HVAC, Plumbing system, Electrical System, Escalators, Elevators, Fire protection, Security & Gas Distributions.  Not a washer and dryer, refrigerator or stove.  Those are classified as equipment. 

Examples of common components of a building:

The hot water heater is part of the Plumbing System. 

Heating, ventilation and air conditioning is part of the HVAC system. 

The electrical panel is a part of the electrical system. 

The rules for deductibility of these expenses are complex and we will deal with them at tax time.  What we need is for you to track them in such a way, so that we can see exactly what was repaired.

Please create the following expense accounts for these repairs:

“Repairs to Building Structure”

“Repairs to HVAC”

“Repairs to Plumbing System”

“Repairs to Gas System”    etc.

When you enter these expenses, let us know what you repaired, and if you expect to repeat this repair in less than 10 years. 

Example: “Paint the building – expect every 5 yrs”, “Roof Recoating – expect every 3 years”, “Hot water heater repair- infrequent repair” etc.  Where “infrequent repair” means you expect it to be more than 10 years before you will repair this again.

If you don’t keep track of these repairs, then the regulations state, we must deduct them over 39 years (or 27.5 if residential rental property).

If you have any further questions, please give us a call.  

(520) 790-2738.      

David Oase CPA                                                                                                                                           Revised 12-13-13