[HoosierCPA]

Our company replaced all our carpet in the admin building, it’s a substantial expense (close to $100k). Capital vs expense debates always seem to be a grey area within our company and I was curious on the technical rules. Currently, we are treating it as a general maintenance to the building, and expensing it. I want to see if the forum agrees!

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Adam]

You can't be serious? That's pretty bad.

Carpet is a fixture and fixated to the building, therefore not treated as 1231 Property so not required to be depreciated under 27.5 years.

However it is not an expense it is a Fixture to the building like i just said..therefore must be depreciated over its usable life. Your company seems to be somewhat clueless accounting wise…this really isnt a grey area.

[HoosierCPA]

Well appreciate the degrading comments Adam, and also for the help. There's a reason we get CPE's because I'll be the first to admit I fall into terrible tendencies to just go about my every day job and not stay sharp on accounting rules. It's as much my fault as anyone so you're right, while its an amateur question our CFO actually made the call to expense it and I've had so many “accountants” come and go that tell me how things were done at their prior job which must make certain things the “right way”…obviously not the case all the time.

Again thanks for the help.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[HoosierCPA]

For what it's worth here is a quote from a college site:

The following are examples of expenditures not to be capitalized as building improvements. Instead, these items should be recorded as repair and maintenance expense:

 Adding, removing and/or moving of walls relating to renovation projects that are not considered
major rehabilitation projects and do not increase the value of the building
 Improvement projects of minimal or no added life expectancy and/or value to the building  
 Plumbing or electrical repairs
 Cleaning, pest extermination, or other periodic maintenance
 Interior decoration, such as draperies, blinds, curtain rods, wallpaper
 Exterior decoration, such as detachable awnings, uncovered porches, decorative fences, etc.
 Maintenance‐type interior renovation, such as repainting, touch‐up plastering, replacement of carpet, tile, or panel sections; sink and fixture refinishing, etc.

Basically it reads, original carpeting is capital. Replacement of carpeting is expense.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Adam]

It wasn't meant to be degrading,,I apologize..I thought you were speaking of colleagues at your place of work.

And I'm not surprised, working on audits some CFO's can be pretty clueless..thats why audits are performed.

I appreciate the notes but carpet falls into none of those categories.

In order, De-minimis fixes are repairs allowed to expense..major improvements increase value must be captialized.
“Same as above
Plumbing and electric are perm parts of a building, so unless total overhaull expense
Cleaning is maintenance.
If the object is easily removable and not fixated to property it is able to be expensed.

Ill copy and paste what the IRS says below..dont read random websites, they are clueless

[Adam]

eneral Principle of Capitalization:

The IRS indicates what constitutes a real property capital improvement as follows:

Fixing a defect or design flaw
Creating an addition, physical enlargement or expansion
Creating an increase in capacity, productivity or efficiency
Rebuilding property after the end of its economic useful life
Replacing a major component or structural part of the property
Adapting property to a new or different use
The proposed regulations require capitalization of amounts paid to acquire, produce, or improve tangible real and personal property, including amounts paid to facilitate (closing costs) the acquisition of tangible property. Amounts paid to repair and main property and equipment are deductable if those amounts are not required to be capitalized under §1.263(a)-3, which states in part that any amounts paid for permanent improvements or betterments made to increase the value of such property must be capitalized. Under the proposed regulations these improvement standards are applied to the building itself and individually to its structural components such as heating and ventilation, plumbing, electrical, fire protection and security systems and escalators and elevators. Also the new regulations will allow the dispositions of component parts of a building resulting in the recognition of a gain or loss upon the retirement of such component.

The proposed regulation also provides a “safe harbor” for routine maintenance. It indicates that recurring activities (inspection, cleaning, testing, replacing parts, and so on) that are expected to be performed as a result of the use of property to keep the property in its ordinarily operating condition aren't capital improvements. The activity is considered routine if, at the time the property was placed in service, the taxpayer reasonably expected to perform the activity more than once during the property's life.

The following table summarizes many of the factual considerations used by the courts. These factors, although not exhaustive, should be considered in your analysis to distinguish between capital expenditures and deductible repairs

[Adam]

Capital
Improvements that “put” property in a better operating condition
Restores the property to a “like new” condition
Addition of new or replacement components or material sub-components to property
Addition of upgrades or modifications to property
Enhances the value of the property in the nature of a betterment
Extends the useful life of the property
Improves the efficiency of the property
Improves the quality of the property
Increases the strength of the property
Increases the capacity of the property
Ameliorates a material condition or defec
Adapts the property to a new use
Plan of Rehabilitation Doctrine

[Adam]

Brand New Carpet puts the building into a like new condition therefore requiring capitalization.

if it was a minor repair or re upholstering to improve quality it could be expensed.

And once again sorry for coming off as degrading was not my intent.

[PJ]

Honestly not the first time I've seen Adam be abrasive on this forum. Maybe you're not aware of it, Adam, but you can come off like a real jerk in your responses.

[Recked]

Lets talk %.
What does the rest of the tax return look like?
Is 100k on the R&M line going to look out of place?
I can see both sides. I wouldn't say new carpeting provides additional life to the building, but it is permanently affixed.

Reminds me of a CPE seminar I took with a tax attorney. He was explaining how a corporate client had purchased a private jet, and due to FAA rules the engines had to be over hauled twice in one year from the number of hours. He expensed the overhaul, the IRS decided it was a capital asset and should be depreciated.
The tax attorney ended up taking it through the courts and won, because the engines needed to be overhauled as per FAA rules, and did not increase the life of the jet or improve it in anyway.
It was a normal and necessary cost of business. I think that dollar amount was around 80k on R&M and red flagged the return. Just sayin'.

I'd get an opinion from your tax attorney, because chances are you are going to need one.
Also, if this building is that large, you should have a piecemeal breakdown of the various components of the building.
The old carpet should be written off if its still being depreciated, that could help to bridge the gap between what your CFO wants to do, and what might be more accurate with tax regs.

“Everything is deductible until you get caught.”

[Anonymous]

If by “from a college site” you mean that it's from a college's asset policy that is posted online, keep in mind that schools are probably following NFP or governmental accounting regulations and not GAAP or tax regulations. So their policies aren't always going to reflect what's correct for general accounting purposes at another entity type.

[Romney_p]

If I recall REG correctly, there is a safe-harbor 10 year rule for real estate. ie if you reasonably expect to do it once every 10 years or more often its a repair otherwise its capitalized.
https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations (about half way down) Also you could possibly 179 it and be done with it.

For GAAP, in my mind, thats a leasehold improvement unless you could somehow reasonably argue the amount is immaterial. (ie we own 20 buildings and have $10M in repair expenses annually)

[j3cpa]

Wouldn’t 179 allow this?

You can also argue the capitalization too. I think there’s substantial authority for both.

Study Material:
GLEIM
BEC - FEB/2012
AUD - FEB/2012
FAR - JULY/2012
REG - JULY/2012

[Anonymous]

I'm pretty sure carpet is not a fixture lol. You can literally rip it out by hand.

[CPWAT]

Well it depends on your company's PPE rules. But honestly, you can have one roll of carpet cost about 200 bucks and bought like 100 rolls so if your company do not capitalize anything that's less than 1k then you can argue the point. But if you want to capitalize it then treat it as an addition.

[Author]

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