I am helping my parents with their books and they have a Golf Cart Rental Business. How do I categorize upgrades made to the golf carts? Is that considered repairs & maintenance??
Depends ... repairs are what are not considered improvements ...
What Is an Improvement Under IRS Rules?
Under the IRS regulations, property is improved whenever it undergoes a:
- Adaptation, or
Think of the acronym B A R = Improvement = Depreciate.
If the need for the expense was caused by a particular event—for example, a storm—you must compare the property's condition just before the event and just after the work was done to make your determination. On the other hand, if you're correcting normal wear and tear to property, you must compare its condition after the last time you corrected normal wear and tear (whether maintenance or an improvement) with its condition after the latest work was done. If you've never had any work done on the property, use its condition when placed in service as your point of comparison.
An expenditure is for a betterment if it:
- ameliorates a "material condition or defect" in the property that existed before it was acquired or when it was produced—it makes no difference whether or not you were aware of the defect when you acquired the unit of property, or UOP (discussed below)
- results in a "material addition" to the property—for example, physically enlarges, expands, or extends it, or
- results in a "material increase" in the property's capacity, productivity, strength, or quality.
An expenditure is for a restoration if it:
- returns a property that has fallen into disrepair to its "ordinarily efficient operating condition"
- rebuilds the property to a like-new condition after the end of its economic useful life, or
- replaces a major component or substantial structural part of the property
- replaces a component of a property for which the owner has taken a loss, or
- repairs damage to a property for which the owner has taken a basis adjustment for a casualty loss.
You must also depreciate amounts you spend to adapt property to a new or different use. A use is "new or different" if it is not consistent with your "intended ordinary use" of the property when you originally placed it into service.
Here's another way to look at the difference between a repair/maintenance expense, and an improvement expense.
- Improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.
- Repair expenses are those expenses incurred to return the property or its assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable.
- Maintenance expenses are those expenses incurred to maintain the property and its assets in the usable condition the property and/or asset was designed and intended for.
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