Capitalization Policy for Real Estate Companies: To capitalize or to expense? Property owners tend to struggle with wanting to expense as much repairs and maintenance (R&M) as possible during the year to maximize tax deductions, and to possibly increase any losses during the year. We assist many clients with determining when to expense and when to capitalize. It can be a tough balancing act, but one that needs to be followed consistently.
Whether there is a financial statement annual audit or and IRS audit, the repairs and maintenance expenses will be analyzed/reviewed to determine if significant items are being properly expensed, or that they should have been capitalized. One sure fire way to eliminate any questions or doubts is to create a formal capitalization policy for your company. Things that may be considered:
- What is the normal size/dollar value of a typical R&M project?
- Does the R&M project repair or replace something on the property?
- Does it extend the useful life of the property or equipment?
- How often is this R&M project performed?
Policy templates make it easy to create and implement a formal capitalization policy.
Are you attempting to expense a roof replacement in the current year? Hmm, think again. Uncle Sam would NOT approve, and neither should your accountant. Getting your property manager and or accountant on the same page with a formal capitalization policy could ward off any questions or concerns, as long as the policy is followed consistently.
Our experienced real estate team can assist with creating and implementing a capitalization policy that make sense for your company. Contact Larry Davidson, CPA at email@example.com if you have questions.