IRS clarifies tax rules for building improvements

Accounting reportSept. 10, 2012

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In a decision that could impact the tax planning and accounting practices of real property owners, developers and tenants, the Internal Revenue Service has issued a new set of regulations that seek to clarify the manner by which the cost of certain building improvements qualify for a federal tax deduction.

[caption id="attachment_61131" align="alignright" width="373"] Christopher Paris, Linda Clark Phillips, Jon Dal Poggetto[/caption]

At issue is the distinction between repairs -- eligible for a full-value deduction in that same tax year -- and capital improvements, which receive a tax deduction over several years along with the depreciable life of the asset.

While the guidance helps brings clarity to a long-contentious issue that has reached as far as the U.S. Supreme Court, accounting leaders in the North Bay and beyond stress that those involved in property improvements should familiarize themselves with the regulations and anticipate a potential change to the flow of tax deductions to their federal tax bill.

"This will have a big effect on people who are extremely active in the real estate industry and making a lot of improvements, but also the industries that own or lease their property," said Christopher Paris, partner in tax services at Moss Adams LLP in Santa Rosa. An increasing number of companies seek property ownership in a low-interest-rate environment, and many have improvement agreements with a landlord, he noted.

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