With the tax deadline of April 15 quickly approaching, Hawai-iUSA Federal Credit Union wants to remind business owners and rental property owners to consult with their tax advisor about changes in tax regulations that impact renovations. Tom Ya-machika, president of the Tax Foundation of Hawaii, gives this update on tax accounting for renovations.

“At the end of 2011, the U.S. Treasury issued the most comprehensive changes to its capitalization regulations in 20 years,” said Yamachika. “One of these regulations creates an opportunity for those who ren ovated real estate, or are considering doing so.



“Consider, for example, a taxpayer who replaces the roof of its building 10 years after buying that building. Under the old regulations, the cost of the new roof needs to be capital-ized over 39 years while the original building cost, which includes the roof that has been replaced, is still being depreciated. The new regulations allow the taxpayer to write off the basis of the old roof — which makes sense because it isn’t there anymore,” Yamachika explained.

“Another feature of the new regulations is the capitalization threshold — the maximum cost of purchased property that can be simply written off in the year of purchase — rather than depreciated. Under the old regulations, the threshold was $100. Under the new regulations, the threshold is raised to $500 per invoice or item, assuming the taxpayer had a policy allowing it to expense items of that price for financial statement purposes. If the taxpayer has an audited ‘applicable financial statement,’ and the taxpayer’s policy is in writing and is effective at the beginning of the year, the threshold can be as high as $5,000 per invoice or item,” said Yamachika.

Yamachika advised that, as with any accounting method issues, there are procedural requirements and technical issues around adopting the method in the new regulations. For further information, please contact your tax professional.

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