Repair and maintenance expense: capitalization vs. expensing under GAAP

Even with recent changes in the treatment of repairs and maintenance expenses for tax purposes, GAAP considerations should serve as a refresher or reminder to formalize your policy.

Deciding whether to expense or capitalize repair and maintenance costs can be difficult. Per GAAP, these costs should be capitalized when they extend the life, increase the capacity, or improve the efficiency or safety of the property.

For example, if a roof was put on with a 10-year life but a new layer of shingles had to be added within that decade, the old asset would come off the books and the cost of the new layer would be added. If only a few shingles needed replaced, it would be considered a repair.

It’s important to consider whether the item being repaired is already capitalized and being depreciated and whether it is being separately tracked or considered part of a larger asset. If the item is capitalized and being separately tracked, dispose of this asset on the books and capitalize the repair and maintenance addition. This avoids having the same asset on the books twice with both being depreciated.

For example, if a leaky ceiling was repaired, it is not capitalized because the original cost of the ceiling is already on the books and being depreciated, and the item is not being separately tracked.

Every company should establish a repair and maintenance policy that includes common repair and maintenance expenses as they incur and decide whether these should be expensed or capitalized. Of course, every repair and maintenance expense should be individually analyzed based on the information noted above. In addition, management should determine a dollar threshold for capitalization of expenses (e.g., items greater than $1,000 are capitalized and less expensive items are expensed, regardless of whether it meets the capitalization criteria).

For reporting purposes, the treatment of repairs and maintenance impacts key performance indicators and debt covenants. Generally, depreciation of a capitalized repair and maintenance cost is excluded from these calculations; whereas, repairs and maintenance expenses are included. It is important to have a sound repairs and maintenance policy in compliance with GAAP to avoid being incompliant with your debt covenants as a result of a review or audit or your records.

Check back for an upcoming discussion on the tax treatment of repairs and maintenance.

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