Capital improvement project spanning 2 tax years

[Amiller1]

I have a large capital improvement to a multi-unit apartment building.  Costs were incurred in 2022 (engineering, permits, etc.), but the project won’t be completed until 2023.  I plan to depreciated this asset once the project is complete and it can be placed in service.  How do I handle the 2022 costs depreciation-wise as they are part of the entire project, but incurred in the year prior to the asset being put into service?

Thanks,

Andrew

[PatriciaV]

Yes, the costs you incurred in 2022 will add to the basis of the improvements once they are placed in service. For now, keep track of those costs for the future. No entry is made for your 2022 tax return.

[Amiller1]

Thanks.  How should this be addressed on the balance sheet?

[PatriciaV]

The costs for an unfinished capital project are considered "Construction in Progress" and are listed separately from capitalized (depreciated) assets. The accounting entry would be CIP (debit) and Cash (credit), in case you can use that info.

[Amiller1]

Specifically, what lines should these cost be entered on Form 1065, Schedule L Balance Sheets per Books?

Thanks,

-Andrew

[PatriciaV]

This asset would be shown on Line 13 Other Assets, with the description "Construction in Progress."

[Amiller1]

Thanks so much.  You have been a great help.

-Andrew

[Amiller1]

Should the 2022 expenses be recorded as repairs or other expenses in 2022 or kept separate until the project is put into service in 2023?  I will have a loss if they are included or a small gain if they are excluded.

Thanks

[Critter-3]

Already addressed in the first answer :   "the costs you incurred in 2022 will add to the basis of the improvements once they are placed in service. For now, keep track of those costs for the future. No entry is made for your 2022 tax return."