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Year-end ’08 tax strategy: Nail down deductions for repairs

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in Small Business Tax

It’s important to understand the tax difference between “repairs” and “improvements.” Generally, repairs keep property in a normal operating condition without adding appreciably to the property’s value or prolonging its useful life. This includes repainting, fixing broken windows and plugging leaks in the roof. You can deduct the cost of repairs on your 2008 return.

Conversely, an improvement adds to the property’s value, prolongs its useful life or adapts it for a new use. Example: Replacing an entire roof is treated as an improvement. Improvements are capital expenditures that must be added to the property’s basis and depreciated. So, you receive no current tax benefit from improvements.

Strategy: Make minor repairs before year-end. These expenses can reduce your tax liability for 2008. But there’s little tax incentive to rush into improvements.

Be careful if you make repairs at the same time you’re doing a major renovation of the business premises. The IRS may say repair costs should be lumped in with the improvement costs and depreciated after those deducted currently.

Tip: Have repairs made separately from a renovation—say, at least a few weeks apart—to lock in current deductions for repair costs.

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