Increase your current business deductions under tangible property safe harbors

Did your business make repairs to tangible property, such asbuildings, equipment or vehicles, in 2025? Such costs may be fully deductibleon your 2025 income tax return — if they weren’t actually for “improvements”that must be depreciated over a period of years.

Betterment, restoration or adaptation

In general, a cost that results in an improvement to a buildingstructure or any of its building systems (for example, the plumbing orelectrical system) or to other tangible property must be capitalized, withdepreciation deductions spread over a few years or longer (depending ondepreciation method and property type). An improvement occurred if there was abetterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalizeamounts paid for work that’s reasonably expected to materially increase theproductivity, efficiency, strength, quality or output of a unit of property orthat’s a material addition to a unit of property.

Under the “restoration test,” you generally must capitalizeamounts paid to replace a part (or combination of parts) that is a majorcomponent or a significant portion of the physical structure of a unit ofproperty.

Under the “adaptation test,” you generally must capitalizeamounts paid to adapt a unit of property to a new or different use — one thatisn’t consistent with your ordinary use of the unit of property at the time youoriginally placed it in service.

Immediate deduction safe harbors

Costs incurred on incidental repairs and maintenance can beexpensed and immediately deducted. But distinguishing between repairs andimprovements can be difficult. A few IRS safe harbors can help:

Routine maintenance safe harbor.Recurring activities dedicated to keeping property in efficient operatingcondition can be expensed. These are activities that your business reasonablyexpects to perform more than once during the property’s “class life,” asdefined by the IRS.

Amounts incurred for activities outside the safe harbor don’tnecessarily have to be capitalized, though. These amounts are subject toanalysis under the general rules for improvements.

De minimis safe harbor.Amounts paid for tangible property can be currently deducted for tax purposesif those amounts are deducted for financial accounting purposes or in keepingyour books and records. However, a dollar limit applies:

• $5,000 if you have an “applicable financial statement,” generally meaning one that’s audited by a CPA, or
• $2,500 if you don’t have an applicable financial statement.

Additional rules apply that may limit or eliminate your currentdeduction for a particular expense.

Small business safe harbor. Forbuildings that initially cost $1 million or less, qualified smallbusinesses may elect to deduct the lesser of $10,000 or 2% of the unadjustedbasis of the property for repairs, maintenance, improvements and similaractivities each year. A qualified small business is generally one with averageannual gross receipts of $10 million or less for the past three tax years.

A variety of tax-saving opportunities

As you can see, various options may be available to immediatelydeduct repair and maintenance costs safely. But keep in mind that improvementsmight also be eligible to be deducted immediately in certain circumstances,such as if they qualify for 100% bonus depreciation or Section 179expensing. Contact us to discuss what you can deduct on your 2025 return and tostart planning for tax-efficient repairs, maintenance and improvements in 2026.

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