We generally follow the same guidance as the IRS in the treatment of capital expenditures for tax return purposes. Here is some of that guidance:
Regulations issued under section 263(a) provided that capital expenditures included amounts paid or incurred to (1) add to the value, or substantially prolong the useful life, of property owned by the taxpayer, or (2) adapt the property to a new or different use.
Capital expenditures, in contrast [to a repair], are for replacements, alterations, improvements, or additions that appreciably prolong the life of the property, materially increase its value, or make it adaptable to a different use. A capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property.
Here is some guidance on how the IRS differentiates a capital expenditure from a repair (a repair and maintenance expenditure would be classified as an operating expense):
In Estate of Walling v. Commissioner, 373 F.2d 190, 192-193 (3rd Cir. 1966), the court explained that the relevant distinction between capital improvements and repairs is whether the expenditures were made to “put” or “keep” property in efficient operating condition. In Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333, 338 (1962), nonacq. on other grounds (1964-2 C.B. 8), the court stated that if the expenditure merely restores the property to the state it was in before the situation prompting the expenditure arose and does not make the property more valuable, more useful, or longer-lived, then such an expenditure is usually considered a deductible repair. In contrast, a capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property.
Examples of capital expenditures as it relates to your church – reported on line 74:
- Building a new fellowship hall or the renovation of such (new walls, flooring, etc.)
- Replacing your HVAC system
- Purchase of new major equipment (organs or other musical instruments)
- Kitchen equipment
- Audio-visual equipment
Examples of repair/maintenance expenses as it relates to your church – reported on line 72b:
- Replacing expensive parts (and the labor for such) to your HVAC system or water heater currently in existence