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Discussion:If You Build It, They Will Capitalize It...I think...

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Discussion Forum Index --> Advanced Tax Questions --> If You Build It, They Will Capitalize It...I think...


Discussion Forum Index --> Tax Questions --> If You Build It, They Will Capitalize It...I think...

Ckenefick (talk|edits) said:

16 March 2014
Taxpayer recently purchased a small building from which he will operate his new Schedule C business. Building is somewhat old and dilapidated, and as a result, requires a substantial improvement, which is underway. He will not be able to commence business until the renovation is completed. The renovation started in October of 2013 and is nearly done. In the meantime, various non-hard costs were incurred and paid, like utilities, hazard insurance, grass mowing out front, etc.

How should these expenditures be accounted for, on an income tax basis of accounting?

Spell Czech (talk|edits) said:

16 March 2014
There's a regulation that addresses what to do with otherwise deductible "operating" expenses during a "major reconstruction" or similar period during which a building is taken out of service. (Yes, the regulation would capitalize them, as I recall.) Perhaps - please note my uncertainty - it, the regulation, would offer insight for the "substantial improvement" during a period before the improvement is placed in service. Maybe that "insight" would allow it, the regulation, to be *distinguished* rather than followed....

But then, yeah, where does that leave you. HellifIknow.

Ckenefick (talk|edits) said:

16 March 2014
Yes, there is such a reg; it deals with Interest Expense...and "associated property." One might find it under 263A, dash 11. And, I do believe, in Dominion Resources, it was shot down.

it, the regulation, would offer insight for the "substantial improvement" during a period before the improvement is placed in service

It might. But would the identified expenditures fall squarely into Section 195?

Spell Czech (talk|edits) said:

16 March 2014
Which broom sweeps first, the 263A or the 195?

Ckenefick (talk|edits) said:

16 March 2014
You have stated the *dilemma* quite nicely...which is it?

Spell Czech (talk|edits) said:

16 March 2014
"You have stated the *dilemma* quite nicely."

[Swiveling hips...] Thank you, thank you very much...

Coddington (talk|edits) said:

16 March 2014
The costs in the OP directly benefit or were incurred because of the production activities? Lawnmowing seems to fall under 195(c)(1)(B), but the other two...not sure. Not enough facts.

Ckenefick (talk|edits) said:

16 March 2014
The utilities, for example, directly benefit the activity because the workmen (and workwomen) wouldn't be able to see were it not for the lighting. In addition, they would not be able to run their saws and power drills without the power.

I suppose I should also say that some utility bills were paid before the production activities physically began, although the intent was to substantially improve this property all along, even before it was bought.

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