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Subject Author Date
Expense or Capitalize? Barbara 03-01-2007
Posted by Barbara on March 1, 2007, 8:49 pm
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 I have read through the recent thread regarding roofs and am
still musing about my situation. I am dealing with a
building built in 1902 that houses commercial spaces on the
ground floor and apartments on the two upper floors.
Electrical was upgraded to 110 in 1945. Everything has been
in working order but the insurance company has demanded that
the electrical now be brought up to current code at least as
far as the kitchens. About half of the work was done in
2006 & progress payments of $48,000+ (@ another $30,000 to
go) were made. I was planning to capitalize until I saw
the discussion here & am wondering if there is any
justification for expensing this work.

Also, if capitalizing is the answer, is it possible to
depreciate each progress payment? The contractors are
working during the day, inconveniencing the business as
little as possible and the apartments are all in working
order each evening, As each part is completed a progress
payment is made. Obviously, we would like to expense as
much as possible in 2006. The building is the only asset in
a bypass trust and there really isn't any cashflow during
this project to give the beneficiaries their income this
year (they agree) so there will be tax at the trust level
which will be less than the beneficiaries would be getting.

Next project is to retrofit the facade for earthquakes as
being demanded by the city . . .

Thanks for any input on this!
~ Barbara

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Posted by L K Williams on March 2, 2007, 12:46 am
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> I have read through the recent thread regarding roofs and am
> still musing about my situation. I am dealing with a
> building built in 1902 that houses commercial spaces on the
> ground floor and apartments on the two upper floors.
> Electrical was upgraded to 110 in 1945. Everything has been
> in working order but the insurance company has demanded that
> the electrical now be brought up to current code at least as
> far as the kitchens. About half of the work was done in
> 2006 & progress payments of $48,000+ (@ another $30,000 to
> go) were made. I was planning to capitalize until I saw
> the discussion here & am wondering if there is any
> justification for expensing this work. ...

This sounds like an improvement and should be capitalized.
Remember, the basic rule is that you capitalize anything
which adds to the value or extends the life of the asset.
Expenses are things which merely restore the value or life
to a condition that existed before.

In this case, you are both adding to the value (a buyer
would obviously pay more for a building with wiring up to
standard) and extending the life. You are not restoring
value or life because they did not previously exist.

You will have to wait until the project is complete before
starting depreciation. That's when, officially, you put
the new wiring in service.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Paul Thomas, CPA on March 3, 2007, 4:48 am
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>> I have read through the recent thread regarding roofs and am
>> still musing about my situation. I am dealing with a
>> building built in 1902 that houses commercial spaces on the
>> ground floor and apartments on the two upper floors.
>> Electrical was upgraded to 110 in 1945. Everything has been
>> in working order but the insurance company has demanded that
>> the electrical now be brought up to current code at least as
>> far as the kitchens. About half of the work was done in
>> 2006 & progress payments of $48,000+ (@ another $30,000 to
>> go) were made. I was planning to capitalize until I saw
>> the discussion here & am wondering if there is any
>> justification for expensing this work. ...

> This sounds like an improvement and should be capitalized.
> Remember, the basic rule is that you capitalize anything
> which adds to the value or extends the life of the asset.
> Expenses are things which merely restore the value or life
> to a condition that existed before.
>
> In this case, you are both adding to the value (a buyer
> would obviously pay more for a building with wiring up to
> standard) and extending the life. You are not restoring
> value or life because they did not previously exist.
>
> You will have to wait until the project is complete before
> starting depreciation. That's when, officially, you put
> the new wiring in service.

I agree it gets capitalized and depreciated, but it seems
that it's being "placed in service" as the work progresses.
So it's possible (but messy) to start depreciation as
payments are made on most if not all of the work.

My thoughts would be totally different if the building were
unoccupied.

--
Paul Thomas, CPA
paulthomascpapc@bellsouth.net

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Seth Breidbart on March 3, 2007, 4:48 am
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>> Electrical was upgraded to 110 in 1945. Everything has been
>> in working order but the insurance company has demanded that
>> the electrical now be brought up to current code at least as
>> far as the kitchens.

> This sounds like an improvement and should be capitalized.
> Remember, the basic rule is that you capitalize anything
> which adds to the value or extends the life of the asset.
> Expenses are things which merely restore the value or life
> to a condition that existed before.

Can "is up to code" be considered a "condition that existed
before"? The wiring *was* up to code in 1946.

Seth

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by L K Williams on March 3, 2007, 4:48 am
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> I have read through the recent thread regarding roofs and am
> still musing about my situation. I am dealing with a
> building built in 1902 that houses commercial spaces on the
> ground floor and apartments on the two upper floors.
> Electrical was upgraded to 110 in 1945. Everything has been
> in working order but the insurance company has demanded that
> the electrical now be brought up to current code at least as
> far as the kitchens. About half of the work was done in
> 2006 & progress payments of $48,000+ (@ another $30,000 to
> go) were made. I was planning to capitalize until I saw
> the discussion here & am wondering if there is any
> justification for expensing this work.

This sounds like an improvement and should be capitalized.
Remember, the basic rule is that you capitalize anything
which adds to the value or extends the life of the asset.
Expenses are things which merely restore the value or life
to a condition that existed before.

In this case, you are both adding to the value (a buyer
would obviously pay more for a building with wiring up to
standard) and extending the life. You are not restoring
value or life because they did not previously exist.

You will have to wait until the project is complete before
starting depreciation. That's when, officially, you put the
new wiring in service.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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