Can I write off improvements to building used for business purposes on Sch C?

[paulap70]

A friend who is a homebuilder has two buildings on his residential property.  He operates as a sole-proprietor and has a disregarded-entity LLC for his business, filing a Schedule C.  One of the buildings is used as a garage for his vehicles and the other is used for business purposes - storing his tools, trailers, etc.  During 2022, he improved the building that is used for business purposes by insulating, drywalling, replacing the garage door with an insulated door, adding an electric heater, and upgrading the electrical panel so that the building is now usable year around for construction projects, such as building cabinets, shelving, etc. in addition to the aforementioned storage use.

Can he expense the costs of these improvements on his Schedule C for 2022?  Thank you for your help!

[Mike9241]

They all sound like betterments to me so they need to be would need to be capitalized unless they meet the exception in reg 1.263(a)-3

https://www.law.cornell.edu/cfr/text/26/1.263(a)-3#:~:text=%C2%A7%201.263%20%28a%29-3%20Amounts%20pa... 

 a quick summary: taxpayers with annual gross receipts (this is from all sources even non-business such as interest or dividend income) for the last 3 years of $10 million or less can elect not to capitalize improvements to eligible building property if the total amount paid during the year for all repairs, maintenance, improvements, and other similar activities performed on the building does not exceed the lesser of $10,000 or 2% of the building's unadjusted basis (the unadjusted basis of the building must be $1,000,000 or less

based on what is described as the work done on the building it would seem that the $10K, 2% limits have been exceeded and therefore all these costs need to be capitalized. 

always wonder why often a friend rather than the taxpayer asks because Turbotax is not licensed for use by preparers who are compensated for return preparation.  

[paulap70]

Thank you so much for the information and the link to the regulation. 

I am not a paid tax professional, but I have a regulatory background in the banking industry, so I get questions from friends in many aspects of finance.  I also get to thinking about things from time to time as is the case with my friend - we were talking about his project, and it made me wonder how this could benefit him regarding his tax situation.  Before I made any comments back to him, I wanted to further research this possibility myself and knowing there are so many helpful persons on this message board, I thought this was a good place to start.  

Being a contractor, he did a lot of the work on his building himself (I think his only labor cost was for his electrician).  I believe his material cost was indeed under the $10,000 threshold mentioned.   On Schedule C, would the amounts fall under line 21, Repairs and Maintenance?  Or someplace else?

Thanks again for your help! 

[Mike9241]

rjust to clarify for you the limit is the lesser of $10K or 2% of the unadjusted tax basis of the building (usually cost unreduced for depreciation) if the tax basis is under $500,000 it's going to be under 2% of the tax basis. also if the building is not 100% business use a proration of the costs would likely be required.  

and the amount is the cost of all repairs, maintenance, and improvements made during the tax year to the building, not just the particular items mentioned.

but if it falls under this limit line 21 would be proper