This post is about the difference between capital improvements and repairs and maintenance expenses. It comes with a list of charts, definitions, and clear explanations to help you make informed decisions for your organization.

What is Capital Improvement?

Capital improvements are things that make your building or property more valuable such as adding amenities or new and/or upgraded features to your property. Examples of capital improvements include: installing a new HVAC system, replacing windows, painting walls, installing solar panels, or upgrading lighting systems so your building/property looks better overall. These types of investments generally last longer than repairs and maintenance (R&M) expenses (also known as routine maintenance).

The IRS has a broad definition for capital improvements:

"Capital improvements generally include improvements or betterments that are designed to prolong the life of a building or to add value to a building. Improvements may include, for example, repainting or replacing windows, floor coverings, roofs, and exterior walls; constructing new buildings; adding parking lots or garages; and providing new utilities (such as central heat and air conditioning systems)."

Repairs and Maintenance Expenses (R&M) are things that keep your property or your building in good working order. They can improve efficiency or comfort and help extend the life of your property. They generally do not add any value to your building (i.e., they don't make it more valuable). Examples of R&M expenses include: repairing leaky faucets, fixing broken windows, or painting over graffiti on the walls. Unlike capital improvements which may last for many years, R&M expenses have a shorter life span because they are incurred often; they are the day-to-day work necessary to keep your property in decent working order.

What are Repair and Maintenance?

Repair and maintenance expenses are expenses that keep your property or building in good working order. They can improve efficiency or comfort and help extend the life of your property. They generally do not add any value to your building (i.e., they don't make it more valuable). Examples of R&M expenses include repairing leaking pipes or fixing broken windows, installing anti-vandal devices, or painting over graffiti on the walls. Like capital improvements, R&M expenses are incurred often and have a short life span; they are the day-to-day work necessary to keep your property in decent working order.

Let's look at some examples of each type of expense and see what they mean for you:

Routine maintenance. If you regularly repair leaky faucets, then your building has a regular source of water damage repair that will last a long time (similar to the cost of restoring moldy walls or repainting old windows). If you regularly fix broken windows, then your building has a reliable source of window repairs that will last for many years (similar to the cost of replacing pans on an old stove).

Capital Improvements. If you are repairing a broken window pane, then you did not replace the whole window. The cost of repairing this broken window (even if it is required often) would be considered a repair and maintenance expense. If you replaced the entire pane (or the entire window), your building or property has gained new functionality, added comfort, and will last longer than before. This would be considered a capital improvement.

What are 2021 updates on maintenance and capital improvements?

In 2015, the IRS issued a new tax code. They revised the definition of Repair and Maintenance and changed it to make it simpler. Now R&M expenses are generally repairs (not maintenance). Capital improvements are still capital investments in your property (no matter what type of expense you have chosen to address with these upgrades).

In 2017, the IRS will issue a new Tax Code that will update the definition of maintenance and capital improvements.

This means that:

In order to determine what is a repair or maintenance expense (R&M), you need to check your existing tax returns for any repair or maintenance expenses incurred in the year before you start your program. If you do not have any R&M expenses in your tax returns, then any repairs or maintenance expenses this year are repairs or maintenance expenses.

In order to determine what is a capital improvement (C&I), you will need to check your old tax returns for any capital improvements incurred in the years before you start your program. If you do not have any C&I expenses in your tax returns, then any C&I expenses this year are capital improvements.

For example: If your organization plans to repair leaks in the building, but does not have R&M expenses this year, then it will be considered a repair expense this year on your current year's taxes (despite being a maintenance expense next year).

As another example: If your organization does not plan to make any repairs but does have capital improvements (C&I) this year, then they will be considered as capital improvements and become part of the organization's assets. These expenses will decrease your assets and increase depreciation.

If you have a repair expense, the IRS expects you to fix it. However, if you also end up with an unexpected maintenance expense because of the repair, the IRS considers that to be an R&M expense. In other words, if you are fixing a broken water pipe and that fix causes water damage in adjacent areas of your school/organization, then that is a repair and maintenance expense that will need to be deducted from your net income. If you have a repair expense and also have maintenance expenses, the IRS expects you to pay for them both because they are part of the same thing.

For more information, you can visit Real Estate Calculators.