At first glance, the distinction between a repair and an improvement may seem less important under today’s tax rules. After all, many qualifying capital improvements can now potentially receive a 100% first-year deduction through bonus depreciation.
But the distinction still matters.
Ordinary repair and maintenance expenses are generally deductible in the year they’re paid or incurred, depending on the taxpayer’s accounting method. Improvements, on the other hand, generally must be capitalized.
The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualifying property and increased the Section 179 expensing limit and phaseout threshold. However, those provisions don’t apply to every improvement.
What’s more, repair treatment can sometimes be more advantageous than relying on bonus depreciation or Section 179.
Here’s what businesses should know.
Understanding the Repair vs. Improvement Rules
In general, a repair keeps property in normally efficient operating condition without substantially increasing its value or extending its useful life.
Common examples could include:
- Fixing a leak
- Replacing a limited number of damaged roof shingles
- Servicing or maintaining machinery
- Performing routine maintenance
An expense generally must be capitalized when the work results in a betterment, restoration or adaptation of a unit of property.
The Betterment Test
Under the betterment test, costs generally must be capitalized when the work is reasonably expected to materially increase the property’s:
- Productivity
- Efficiency
- Strength
- Quality
- Output
A material addition to a unit of property may also trigger capitalization.
The Restoration Test
The restoration test generally applies when an expenditure replaces a major component or significant portion of the physical structure of a unit of property.
As a result, replacing a substantial part of a property may be considered an improvement rather than an ordinary repair.
The Adaptation Test
Costs may also need to be capitalized when they adapt property to a new or different use that isn’t consistent with how the property was originally used when it was placed in service.
For buildings, these tests generally apply separately to the building structure and certain designated systems, including:
- Plumbing
- Electrical
- HVAC
- Elevators
- Fire protection
- Security systems
That means replacing an entire building system can potentially be treated as an improvement even when the work involves only part of the building.
Tangible Property Safe Harbors
The tax rules include several safe harbors that may allow businesses to deduct expenditures currently even when those costs might otherwise need to be capitalized.
Routine Maintenance Safe Harbor
Recurring maintenance may qualify for the routine maintenance safe harbor when the taxpayer reasonably expected, when the property was placed in service, to perform the activity more than once during:
- A 10-year period for buildings, or
- The applicable class life for other property, such as three or seven years.
When the requirements are satisfied, the related costs may be currently deductible.
Small Business Safe Harbor
Certain small businesses may qualify for an annual election allowing them to deduct qualifying costs for improvements, repairs and maintenance to eligible buildings.
Generally, the business must have had average annual gross receipts of $10 million or less during the preceding three tax years.
The eligible building must also have an unadjusted basis of $1 million or less.
The total amount spent on qualifying repairs, maintenance and improvements during the year generally cannot exceed the lesser of:
- $10,000, or
- 2% of the building’s unadjusted basis.
De Minimis Safe Harbor
The de minimis safe harbor may allow businesses to deduct certain qualifying expenditures rather than capitalizing them.
Subject to applicable accounting policies and recordkeeping requirements, the threshold is generally:
- $2,500 per invoice or item for businesses without an applicable financial statement
- $5,000 per invoice or item for businesses with an applicable financial statement
These safe harbors come with specific requirements, and some elections must be made annually on a timely filed tax return.
Capitalized Improvements May Still Qualify for a First-Year Deduction
Having to capitalize an expenditure doesn’t necessarily mean waiting years to recover the cost.
Under the OBBBA, 100% bonus depreciation was permanently restored for qualifying property acquired and placed in service after January 19, 2025.
Eligible property generally includes certain:
- Machinery
- Equipment
- Qualified improvement property (QIP)
This can allow qualifying capitalized costs to be deducted in full during the year the property is placed in service.
What Is Qualified Improvement Property?
Qualified improvement property generally consists of improvements to the interior of an existing nonresidential building.
However, certain expenditures don’t qualify as QIP, including costs attributable to:
- Enlarging a building
- Elevators or escalators
- The internal structural framework of a building
Such costs generally aren’t eligible for QIP treatment and may instead have to be depreciated over a longer recovery period, potentially 39 years.
How Section 179 May Help
Section 179 provides another potential way to expense qualifying property.
Depending on the circumstances, it may apply to:
- Machinery
- Equipment
- Qualified improvement property
- Certain improvements to nonresidential real property
Eligible building improvements can include certain:
- Roofing
- HVAC systems
- Fire protection systems
- Fire alarm systems
- Security systems
The OBBBA significantly increased the Section 179 expensing limit for 2025 and also increased the phaseout threshold.
For 2026, businesses may generally deduct up to $2.56 million of qualifying costs. The deduction begins to phase out when qualifying purchases exceed $4.09 million.
The Section 179 deduction is also subject to the taxable-income limitation applicable to the active conduct of a trade or business.
Don’t Forget the Placed-in-Service Requirement
For both bonus depreciation and Section 179, simply purchasing or paying for property isn’t necessarily enough.
Generally, qualifying property must be placed in service — meaning ready and available for its intended use — by the end of the year.
For 2026 year-end planning, this means businesses shouldn’t assume that an order placed or equipment purchased before December 31 automatically creates a 2026 deduction.
Why Repair Treatment Can Still Be More Valuable
Even if an improvement qualifies for a full first-year deduction, repair treatment isn’t the same as bonus depreciation or Section 179.
When an expenditure legitimately qualifies as a deductible repair, treating it as a repair rather than capitalizing it may offer several advantages.
Repairs Aren’t Subject to Bonus Depreciation Requirements
Repair expenses generally don’t need to satisfy the eligibility and placed-in-service requirements associated with bonus depreciation.
Repairs Aren’t Subject to Section 179 Limits
Unlike Section 179, an ordinary repair deduction isn’t subject to the Section 179 dollar limits or its taxable-income limitation.
Repairs Can Simplify Recordkeeping
Proper repair treatment can also eliminate the need for depreciation elections and some of the additional basis tracking associated with capitalized property.
It may also reduce potential depreciation recapture issues when the property is eventually sold.
Don’t Forget State Tax Rules
Federal tax treatment isn’t always the whole story.
Some states don’t fully conform to federal bonus depreciation or Section 179 provisions. As a result, a business may receive a more immediate state tax benefit when an expenditure qualifies as a repair rather than an improvement.
And if an improvement qualifies for neither bonus depreciation nor Section 179, the business may have to recover the cost over the property’s applicable depreciation period — potentially as long as 39 years for certain building costs.
2026 Year-End Tax Planning
With year-end approaching, businesses should review their 2026 property-related expenditures to make sure they’ve been classified correctly.
It’s worth asking:
- Were expenses properly treated as repairs or improvements?
- Does a safe harbor apply?
- Could bonus depreciation provide a first-year deduction?
- Is Section 179 available?
- Has qualifying property actually been placed in service?
- Will state tax rules produce a different result?
- Are additional equipment purchases or improvements worth completing before year-end?
Careful planning can make a significant difference in when and how a business recovers the cost of its property expenditures.
Before year-end, consider reviewing your 2026 repairs, maintenance expenses and planned improvements with your tax adviser. Proper classification and the right choice of available tax provisions could help maximize your current-year deductions while avoiding unnecessary capitalization.
© 2026