Repair Expense or a Capital Improvement?

Understanding the Difference

By: Stephen Zogal, EA

Date: 6/9/2025

It is not uncommon for a taxpayer to miscategorize a capital improvement as a repair expense as they usually are unaware of the tax code implications. An important question to ask "repair expense or a capital improvement" should be something everyone considers prior to filing your taxes.

Under U.S. tax law, distinguishing between a “repair” and an “improvement” is crucial because the tax treatment of each is significantly different. Repairs are generally deductible in the year incurred as ordinary and necessary business expenses under I.R.C. § 162, while improvements must be capitalized and depreciated over time in accordance with I.R.C. § 263(a).

A “repair” keeps the property in normal operating condition without materially adding to its value, prolonging its useful life, or adapting it to a new or different use. According to I.R.C. § 162(4), amounts paid for repairs and maintenance that do not improve a unit of property (UOP) are deductible as business expenses.

An example of this would be replacing a few shingles on a roof that were damaged in a storm would typically be classified as a repair. It restores the property to its ordinary condition and does not enhance or prolong the life of the entire roofing system. The case of Midland Empire Packing Co. v. Commissioner, 14 T.C. 635 (1950), supports this. The court held that sealing a basement to prevent oil seepage was a repair and thus deductible. The work restored the property to its former state and did not improve it beyond its original condition.

Improvement of Capital Expenditure

Improvements are capital expenditures. As per I.R.C. § 263(a)(3), an improvement occurs when a taxpayer pays to:

1. Better a unit of property.

2. Restore a unit of property.

3. Adapt a unit of property to a new or different use.

Capital improvements must be capitalized and then depreciated over the applicable recovery period using MACRS (Modified Accelerated Cost Recovery System), typically governed by I.R.C. § 168.

Example: Replacing an entire roof, rather than patching a few shingles, is considered an improvement because it prolongs the life of the building. However, patching a few shingles would allow the repair costs to be an expense. Similarly, converting an attic into a rental unit would be adapting the property to a new use which would require the use of capital expenditures.

In United States v. Wehrli expenditures to restore significant structural defects in a building were deemed capital in nature, as they materially increased the building's value and prolonged its life.

Overall, classifying an capital improvement as a repair can cause a tax liability for the taxpayer. It's best to consult with your tax advisor on the nature of the project before classifying to avoid consequences and issues with the IRS.

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