Capitalization of repair costs mandated by law.

• Jurisdiction: United States
• Author: Hudson, Boyd D.
• Date: 01 May 1997

Business taxpayers who own buildings increasingly find it necessary to make repairs and improvements as these structures get older. Most expenditures are in the nature of repairs that generally maintain the structure, but do not add to its physical life. Such expenditures may be deducted as ordinary and necessary; see Sec. 162(a) and Regs. Sec. 1.162-4. However, if the expenditure is for a permanent improvement, or has the effect of increasing the property's value or appreciably prolonging its life, the expenditure must be capitalized (Sec. 263(a); Regs. Sec. 1.162-4). Often, the line between a repair and a permanent improvement is a fuzzy one. The distinction is further complicated if the taxpayer is mandated to make the repair by government ordinance.

In 1969, the City of San...