@DanielV01 Thank you for accepting that these repairs must be capitalized. Thank you for sharing your views. I really appreciate all the input here. I also understand that I should take a position that is defendable during IRS audit.
However, I think we are over-complicating it by creating separate assets for restoration property.
Probably more "technically correct" under this situation is treat the expenses as a "separate" depreciation element, This would be consistent with how the IRS normally would treat a capitalized improvement.
>> While I do agree that improvements must be capitalized, I think a "separate" depreciation is not needed.
I support my position based on the following excerpt from Rev-Rul 71-161 that talks about business property casualty damage
2. The published position of the Service.
Rev. Rul. 71-161, 1971-1 C.B. 76, specifically applies these principles to the case of property damaged by a casualty. In that revenue ruling, the taxpayer sustained business property damage as a result of a hurricane and paid for the removal of debris and repair of the damaged property. The debris and damage to the property resulted in a decrease in the fair market value of the property immediately after the casualty. The cost of the debris removal and property repair was used as evidence of the amount of the casualty loss sustained. The revenue ruling holds that the debris removal and repair costs themselves are “in the nature of replacement of the part of the property that was damaged.” Id. at 77. Accordingly, the costs are capitalized and added to the property’s basis pursuant to § 1016(a)(1).
This means that restoration that covers any reduction in the basis due to casualty should be added back to the basis. Hence, in my case, the basis would remain unchanged. If the basis remains unchanged, then we may continue to depreciate the asset as before in TurboTax.
cc: @Carl
