Tax Treatment of Expenses to Carry Unproductive Assets
An unproductive asset is one in which the taxpayer has invested but has not seen a return. This unreturned expense generates additional expenses and taxes, even though the asset fails to return as much as it costs. Though currently unproductive, the asset may have the ability to earn income after repair and improvements. As a result, the U.S. Internal Revenue provides limited options on carrying unproductive assets.
Other People Are Reading
-
Deduct or Capitalize
-
The U.S. Internal Revenue Service (IRS) permits taxpayers to treat the expenses from unproductive assets as ordinary expenses or capital outlay. Ordinary expenses are costs required to maintain the property, such as utility costs, repair and insurance premiums. As ordinary expenses, the expenses from the unproductive assets are treated as standard deductions. As capital outlay, the expenses are treated as the additional costs required to complete the purchase or improve the value or usability of the property. Capital outlays, or capitalized expenses, are often quite similar to ordinary expenses and include costs such as repair, remodeling and rehabilitation of the property. However, when expenses are capitalized, the expenses are added toward the value of property rather than being deducted from the expenses of the property.
Filing
-
Taxpayers who capitalize their unproductive asset expenses must formally notify the IRS of the decision. The decision expires at the end of each year and must be formally renewed each following year to continue the status. The capitalized unproductive asset expenses must be accurately reported in the tax filing documents and the tax return must include IRS Form 3468: Investment Credit. Individual taxpayers must also include an IRS Schedule A: Itemized Deductions.
-
Formal Notification
-
Along with accurate forms, the IRS requires taxpayers to formally declare their decision to capitalize unproductive asset expenses. To do so, the taxpayer must write a statement of declaration, outlining the expenses that will be capitalized. This declaration must be included with the completed tax return or included in an amended form within six months of the original return. Declaration statements attached to amended returns must include the words “Filed pursuant to section 301.9100-2.” Amended returns should be forwarded to the same IRS processing address as the original return.
Considerations
-
Determining whether to deduct or capitalize unproductive asset expenses is a personal decision that should only be based on the taxpayer’s specifics. The decision not only affects the taxpayer’s tax liability, it affects the taxpayer’s filing and form requirements. Speak with a tax professional for assistance in making your decision and completing your forms, if necessary.
An Example
-
Newly purchased property is an asset that commonly presents owners with the decision to deduct or capitalize. If you purchase a new property, it may require various repairs and modification before you can truly begin to utilize the property as intended. You may be unable to move into the home until the repairs are complete. Still, you are responsible for utility costs, insurance costs and even property taxes, even though the home is unlivable. In this instance, you can capitalize the property, rather than take standard deductions on the expenses. If you capitalize the property, the listed expenses are attached to the value of the property and recovered when you sell the property.
-
