Did your company handle repairs on tangible property — such as buildings, equipment, or vehicles — during 2025? Many of these costs may be fully deductible on your 2025 tax return, provided they don’t qualify as “improvements” that must be depreciated over several years.
Betterment, Restoration, or Adaptation
In general, expenses that improve a building structure, its systems (like plumbing or electrical), or other tangible property must be capitalized and depreciated over time. An expense is considered an improvement if it involves:
Betterment Test
You must capitalize costs that materially increase the productivity, efficiency, strength, quality, or output of a property, or add a significant new feature.
Restoration Test
You must capitalize costs that replace a major component or a significant portion of a property’s physical structure.
Adaptation Test
You must capitalize costs that adapt a property to a new or different use, inconsistent with its original purpose when placed in service.
Immediate Deduction Safe Harbors
While improvements must be capitalized, incidental repairs and maintenance can often be expensed immediately. The IRS provides several safe harbors to help businesses distinguish between repairs and improvements:
Routine Maintenance Safe Harbor
Recurring activities that keep property in efficient operating condition can be expensed. These are tasks your business expects to perform more than once during the property’s IRS-defined “class life.”
De Minimis Safe Harbor
Businesses may deduct amounts paid for tangible property if those amounts are also deducted for financial accounting purposes. Dollar limits apply:
- $5,000 if you have an applicable financial statement (typically audited by a CPA).
- $2,500 if you don’t have an applicable financial statement.
Small Business Safe Harbor
For buildings initially costing $1 million or less, qualified small businesses may deduct the lesser of $10,000 or 2% of the property’s unadjusted basis annually for repairs, maintenance, and improvements. A qualified small business generally has average annual gross receipts of $10 million or less over the past three years.
Tax-Saving Opportunities
These safe harbors provide valuable opportunities to deduct repair and maintenance costs immediately. Additionally, certain improvements may qualify for 100% bonus depreciation or Section 179 expensing, allowing for immediate deductions.
Consult with a tax professional to determine which expenses qualify for deduction on your 2025 return and to plan strategically for 2026.