Some auto dealers are concerned that the assistance they receive from manufacturers to help with the cost of required facility upgrades must be recognized as taxable income in the year received. While that may be true, in some cases the cost of upgrades may be deductible as a current period expense under IRS rules. It is almost always preferable to deduct expenditures in the year paid as opposed to capitalizing them and recapturing the costs over the normal 39-year life of a building.
Steve Barber’s Insights article of June 21, 2011 addressed shorter depreciable lives for certain segments of the facility upgrades. In addition, IRS rules allow immediate write-off if certain conditions are met. The improvements may be considered a repair, deductible in the year paid, if the improvements do not:
- significantly increase the value of the real estate,
- prolong the life of the property,
- adapt the building to a new or different use, or
- restore the facility to its ordinary operating condition if it has deteriorated to a state of disrepair and can no longer function for its intended purpose.
Many times, facility upgrades for auto dealerships meet these criteria. The expenditures need to be analyzed in detail to determine whether the above requirements are met. Among other things, the taxpayer will have to support the determination that the building constitutes one unit of property and that the upgrades were simply repairs to that unit. Upon examination, the IRS will want to see documentation to support the unit of property determination and to support the assertion that the above criteria are met.
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