Why Repair and Improvement Classifications Still Matter
Ordinary repair and maintenance expenses are generally deductible in the year they’re paid or incurred, depending on a business’s accounting method. By contrast, costs that improve property must generally be capitalized.
However, capitalization doesn’t always mean waiting years to recover the cost. The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for certain qualifying property and increased the Section 179 expensing limit and phaseout threshold.
These provisions don’t apply to every improvement, and repair treatment may offer advantages even when an improvement qualifies for immediate expensing. Understanding the distinction can help your business evaluate its deductions, maintain accurate records and make informed year-end purchasing decisions.
Is the Expense a Repair or an Improvement?
Repairs generally keep property in ordinarily efficient operating condition without adding significant value or substantially extending its useful life. Examples may include:
- Fixing a leak
- Replacing a small number of damaged roof shingles
- Servicing machinery
- Replacing minor worn components
An expenditure generally must be capitalized as an improvement if it results in a betterment, restoration or adaptation of the applicable unit of property.
The Betterment Test
An expenditure may be considered a betterment if the work is reasonably expected to:
- Materially increase the property’s productivity, efficiency, strength, quality or output
- Correct a material condition or defect
- Create a material addition to the property
The Restoration Test
An expenditure may be considered a restoration if it:
- Replaces a major component or substantial structural part
- Returns deteriorated property to ordinarily efficient operating condition
- Rebuilds the property to like-new condition after the end of its class life
- Replaces property for which the business recognized a loss
The Adaptation Test
An expenditure generally must be capitalized when it adapts property to a new or different use that isn’t consistent with the business’s intended use when the property was originally placed in service.
For buildings, these tests generally apply separately to the building structure and designated systems, including:
- Plumbing
- Electrical systems
- Heating, ventilation and air conditioning
- Elevators and escalators
- Fire protection systems
- Security systems
As a result, replacing an entire building system may be considered an improvement even if the work affects only one portion of the building.
The IRS provides additional guidance on distinguishing deductible repairs from capital improvements through its tangible property regulations.
Tangible Property Safe Harbors May Allow Immediate Deductions
Several tax safe harbors may allow businesses to currently deduct expenditures that might otherwise need to be capitalized. Each safe harbor has specific eligibility, documentation and election requirements.
Routine Maintenance Safe Harbor
Recurring work performed to keep property in ordinarily efficient operating condition may qualify as deductible routine maintenance.
When the property was placed in service, the business generally must have reasonably expected to perform the activity:
- More than once during a 10-year period for buildings
- More than once during the property’s applicable class life for property other than buildings
Whether an activity qualifies depends on the facts and circumstances, including the nature and frequency of the work.
Safe Harbor for Small Taxpayers
A business with average annual gross receipts of $10 million or less during the three preceding tax years may qualify to deduct certain costs related to an eligible building.
To qualify:
- The building must have an unadjusted basis of $1 million or less.
- Total annual repairs, maintenance and improvement costs for the building must not exceed the lesser of $10,000 or 2% of the building’s unadjusted basis.
- The election must generally be made annually on a timely filed original federal income tax return.
This safe harbor is applied separately to each qualifying building.
De Minimis Safe Harbor
Subject to accounting-policy and recordkeeping requirements, the de minimis safe harbor may allow a business to deduct qualifying property expenditures of up to:
- $2,500 per invoice or item for businesses without an applicable financial statement
- $5,000 per invoice or item for businesses with an applicable financial statement, such as a qualifying audited financial statement
The safe harbor generally requires businesses to apply consistent capitalization policies for financial accounting purposes and make an annual election with a timely filed tax return. Review the IRS tangible property regulations for additional requirements.
Maintaining accurate records is essential when applying these rules. THF’s business accounting services can help businesses strengthen their accounting processes and organize the information needed for tax planning.
Capitalized Costs May Qualify for First-Year Deductions
If an expenditure must be capitalized, the business may still be able to deduct some or all of its cost in the year the property is placed in service.
Permanent 100% Bonus Depreciation
The OBBBA restored permanent 100% bonus depreciation for certain qualified property acquired and placed in service after January 19, 2025. Qualifying property generally may include machinery, equipment and qualified improvement property.
Property acquired before January 20, 2025, may remain subject to the previous phaseout rules, even if it was placed in service later. The IRS explains the applicable timing rules in its guidance on depreciation deductions.
What Is Qualified Improvement Property?
Qualified improvement property, or QIP, generally includes improvements made to the interior of an existing nonresidential building after the building was first placed in service.
QIP generally doesn’t include expenditures related to:
- Enlarging a building
- Elevators or escalators
- A building’s internal structural framework
Improvements that don’t qualify as QIP or for another accelerated deduction may need to be depreciated over a longer recovery period—potentially as long as 39 years.
Section 179 Expensing for 2026
Section 179 may allow businesses to immediately expense qualifying machinery, equipment and QIP. It can also apply to certain improvements made to nonresidential real property after the building was placed in service, including:
- Roofs
- HVAC systems
- Fire protection and alarm systems
- Security systems
For tax years beginning in 2026, businesses may deduct up to $2.56 million of eligible Section 179 property. The deduction begins to phase out when qualifying property placed in service during the year exceeds $4.09 million. It is also generally limited by taxable income from the active conduct of a trade or business.
These inflation-adjusted amounts are confirmed in IRS Publication 946, How To Depreciate Property.
Eligible property generally must be placed in service—meaning ready and available for its intended use—by the end of the tax year. Merely purchasing, ordering or paying for property isn’t sufficient.
Why Repair Treatment May Still Be More Advantageous
Even when a capital improvement qualifies for a full first-year deduction, classifying the expenditure as a repair isn’t necessarily interchangeable with claiming bonus depreciation or Section 179.
When an expenditure meets the requirements for repair treatment, a current deduction may offer several advantages:
- Repair expenses don’t have to satisfy the eligibility requirements for bonus depreciation.
- Repair deductions aren’t subject to Section 179 dollar or taxable-income limitations.
- Repair expenses generally don’t require depreciation elections or ongoing basis tracking.
- Repair treatment may reduce potential depreciation recapture issues when the property is sold.
- The expenditure doesn’t have to satisfy the placed-in-service requirement applicable to depreciable property.
State tax treatment may also affect the decision. Some states don’t fully conform to federal bonus depreciation or Section 179 rules. When applicable, properly classifying an expense as a repair may provide an earlier state income tax deduction.
Review Property Expenditures Before Year-End
Year-end tax planning is an ideal time to review property-related expenditures and determine whether they have been classified correctly.
Your review should consider:
- Whether an expenditure is a repair or capital improvement
- Whether a tangible property safe harbor applies
- Whether capitalized property qualifies for bonus depreciation
- Whether a Section 179 election may be beneficial
- Whether the property will be placed in service before year-end
- How federal and state tax treatment may differ
- Whether sufficient documentation supports the classification
Businesses planning additional purchases or improvements should evaluate these rules before committing to a transaction. The timing, intended use and type of property may materially affect the available deduction.
Accurate financial records can make this analysis more efficient. Learn how THF’s outsourced accounting services can support your organization’s bookkeeping, reporting and financial-planning needs.
Make Informed Property and Tax-Planning Decisions
The distinction between a repair and an improvement continues to matter under current tax law. Proper classification can affect the timing of deductions, eligibility for tax incentives, recordkeeping responsibilities and future tax consequences.
Before year-end, let the THF team help you review your 2026 property expenditures, evaluate available safe harbors and determine whether bonus depreciation or Section 179 may apply.
Contact THF today to discuss your business tax-planning needs.
