Classifying Purchases

[rob0225]

Question about how to classify purchases for tax purposes (I own a QSR restaurant)

1. If I purchase supplies to make improvements to the building, I.E. I replaced the ceiling tiles, but I purchased and did the work myself. Is this leasehold improvement cost or repairs and maintenance? Does it matter how I classify it?

2. Do I need to separate out my paper, food costs, cleaning supplies, office supplies or are they are considered supplies and materials needed to operate?

Thanks,

Robert

[Evan]

1. Yes, it matters. If it's under $200, I'd expense it. Otherwise, it is a leasehold improvement, and must be depreciated accordingly.

2. Paper and office supplies are an "office expense". The costs of food is INVENTORY, and are NOT an expense until it's used. Cleaning supplies you could throw under "repairs and maintenance".

[nealrm]

Robert,
By "Food Costs" are you referring to meals purchased at restaurants during travel, to meals purchased for employees, to food items stored on site and eaten by you or your employees or to food items that are used to produce a product you sell?

[rob0225]

Food Cost=Cost of Goods to produce the food we sell.

[Business Attorney]

The test for whether an expenditure on a building is a deductible repair or an improvement that must be capitalized and depreciated or amortized is this: does the work add to the value OR substantially prolong the useful life of property?

Even painting the front door or replacing a light switch that has shorted out arguably may "add to the value" of a property in the sense that the failure to make those common repairs would otherwise depress the value of the property. Common sense dictates that expenses that merely preserve the property in its current state, although one could argue that the expense minimally adds value to a property, is not a capital expense.

I can't answer your specific question about ceiling tiles but I can tell you that I own rental properties and there are many repairs which are well over $200 that clearly do not add value to the property and do not substantially prolong the useful life of the property. While the size of the expense may indicate that it is in the nature of a capital improvement, the dollar amount alone is not the appropriate test.

[Evan]

The test for whether an expenditure on a building is a deductible repair or an improvement that must be capitalized and depreciated or amortized is this: does the work add to the value OR substantially prolong the useful life of property?

Even painting the front door or replacing a light switch that has shorted out arguably may "add to the value" of a property in the sense that the failure to make those common repairs would otherwise depress the value of the property. Common sense dictates that expenses that merely preserve the property in its current state, although one could argue that the expense minimally adds value to a property, is not a capital expense.

Figuring out whether they help "prolong the useful life of property" can be tough. As you noted, if the repair wasn't made, and who knows what effect it'd have on the property.

Paint is a very good example. Say the building was bright pink... does using a more "common" color (e.g. blue, white, etc.) add to its value? It may. But if your house was white, and you're repainting it -- why, and will it help increase the value?

I do agree that this test should be considered, but it is easy to see how everything "could" fall in this category.

Repairs and maintenance, despite the "easy name", can be complicated, as inevitably a lot of things can be considered R&M or a leasehold improvement.

Of course you have a lot of things which are clearly one or the other.

[Evan]

Food Cost=Cost of Goods to produce the food we sell.

This is inventory, so it is not an expense. Inventory relates to the Cost of Goods Sold account (and related schedule).