Repair or depreciation??

[oceanlovin'ea]

Client had to have new part in air conditioning unit in a rental house. It was a furnace and evaporator coil. The unit was not replaced just some of the parts. That is how I understand it.
So is this considered a repair to the unit? Or is the cost of the furnace and coil a new depreciable item? The cost was $2800.00. If it is depreciated is it 27.5 years?

Linda F

[Gretel]

I don't know the correct wording but there is something about a repair costing more than 50% of what a total replacement would be. If it is not even close than that is an indicator for a repair.

[TAXNJ]

See if....

these guidelines help

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations

[oceanlovin'ea]

Well, the cost was over $2500. It was $2800. That rules out the safe harbor method.
I do think it was fixing part of the whole HVAC system. And the different treatment does result in a large difference. Expensing $2800 vs depreciation $2800 over 27.5 years!!!!!
I really don't think it would fall into the 5 year depreciation category.

I have so much going on right now. My soon to be 97 year old mother is declining rapidly. Even though she has caregivers at her home with her the last 2 weeks have been daily decisions about her care. My brain is fried. I'm stressed out and overwhelmed. Every crisis comes during tax season!!!!! Ok - enough ranting. I'll survive.

Guess I'll just go the safest route and depreciate it over 27.5 years.

Linda F

[mastertaxguy]

AFS? Per item?

Client had to have new part in air conditioning unit in a rental house. It was a furnace and evaporator coil. The unit was not replaced just some of the parts. That is how I understand it.
So is this considered a repair to the unit? Or is the cost of the furnace and coil a new depreciable item? The cost was $2800.00. If it is depreciated is it 27.5 years?

Linda F

Why would the following not apply?

"If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to 1-1-2016) per invoice or item (as substantiated by invoice)." (Tangible Property Regulations - Frequently Asked Questions).

[DonB]

Well, the cost was over $2500. It was $2800. That rules out the safe harbor method.
I do think it was fixing part of the whole HVAC system. And the different treatment does result in a large difference. Expensing $2800 vs depreciation $2800 over 27.5 years!!!!!
I really don't think it would fall into the 5 year depreciation category.

I have so much going on right now. My soon to be 97 year old mother is declining rapidly. Even though she has caregivers at her home with her the last 2 weeks have been daily decisions about her care. My brain is fried. I'm stressed out and overwhelmed. Every crisis comes during tax season!!!!! Ok - enough ranting. I'll survive.

Guess I'll just go the safest route and depreciate it over 27.5 years.

Linda F

Safe Harbor for Small Taxpayers: Did it cost less than 2% of the unadjusted basis of the building?

[DonB]

Safe Harbor for Small Taxpayers: Did it cost less than 2% of the unadjusted basis of the building?

I should have said, did all maintenance and repairs cost less than 2% of the building unadjusted basis.

[taxea]

Replacement of parts is repair/maintenance

[Twin Turbo Z]

Dont depreciate at 27.5. Choose 10 year or 15

[TaxGuyBill]

It sounds like a depreciable improvement, as a "restoration".

From the link that TAXNJ gave: "Replacement of a major component or substantial structural part"

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#restore

Dont depreciate at 27.5. Choose 10 year or 15

On what basis would you use 10 or 15? HVAC (Central Air) is a "building system" and for residential property would use the same recovery period as the building.

[Twin Turbo Z]

Life expectancy of the unit sure the heck is not 27.5 years. Especially the evaporator coil. If they lasted 27.5 years then we wouldn't be having this conversation. Repairs or 10 or 15 is my take on it, but hey, you guys are the experts

[TaxGuyBill]

Life expectancy of the unit sure the heck is not 27.5 years. Especially the evaporator coil. If they lasted 27.5 years then we wouldn't be having this conversation. Repairs or 10 or 15 is my take on it, but hey, you guys are the experts

I agree that the Life Expectancy is not that long, but deprecation has not been based on "Life Expectancy" since 1986. Depreciation is based on IRS dictated "Recovery Periods", regardless if the real-life Life Expectancy is much different than that amount.

[Twin Turbo Z]

I agree that the Life Expectancy is not that long, but deprecation has not been based on "Life Expectancy" since 1986. Depreciation is based on IRS dictated "Recovery Periods", regardless if the real-life Life Expectancy is much different than that amount.

Show me on where the IRS list an "Evaporator Coil" is 27.5 years Its a judgement call IMHO. Not trying to rattle cages....

[TaxGuyBill]

Show me on where the IRS list an "Evaporator Coil" is 27.5 years Its a judgement call IMHO. Not trying to rattle cages....

Show me any other category that it fits in. :-)


I'll cite the IRS Audit Guide for now. It states that "Building or Building Component" for a commercial building is §1250 property and is depreciated over 39 years. In regards to air conditioning, as a "Building Component" it states:

"Includes all components of a central heating, ventilating and air conditioning system not specifically identified elsewhere. HVAC systems that are installed not only to meet the temperature and humidity requirements of machinery, but are also installed for additional significant purposes, such as customer comfort and ventilation, are building components."

https://www.irs.gov/businesses/cost-segregation-guide-chapter-72-industry-specific-guidance-restaurants

§1.263-3(b) helps to define "Real Property" (which is clearly indicated for depreciation at 27.5/39 years) for purposes of capitalization. It references §1.48-1, which says (in part):

"The term “structural components” includes such parts of a building as walls, partitions, floors, and ceilings, as well as any permanent coverings therefor such as paneling or tiling; windows and doors; all components (whether in, on, or adjacent to the building) of a central air conditioning or heating system, including motors, compressors, pipes and ducts; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys; stairs, escalators, and elevators, including all components thereof; sprinkler systems; fire escapes; and other components relating to the operation or maintenance of a building."

https://www.law.cornell.edu/cfr/text/26/1.263(a)-3

https://www.law.cornell.edu/cfr/text/26/1.48-1

[Twin Turbo Z]

Its all good. OMG Casano' Pizza is here !!!