Schedule C, Box 22: Repairs vs. Improvements
For Schedule C filers, the distinction between a repair and an improvement is key. This classification directly impacts your current-year deduction and tax liability.
Self-employed individuals, such as freelancers and sole proprietors, use IRS Form 1040 Schedule C to report their business’s profit or loss to the IRS. Part II of this form, “Expenses,” is where business owners can deduct costs incurred during the year. Specifically, Box 21 is designated for reporting expenses related to repairs and maintenance.
Defining Repairs and Maintenance
For tax purposes, repairs and maintenance are expenses that keep your business property in a normal, efficient operating condition. These are routine costs that do not significantly add to the property’s value or prolong its useful life, but instead restore an asset to its previous condition. Common examples of deductible repairs include repainting a room, fixing a broken piece of machinery, patching a minor leak in a roof, or repairing a broken window. These expenses are fully deductible in the year they are paid.
Differentiating from Capital Improvements
A frequent point of confusion is the line between a repair and a capital improvement. An improvement is a cost that betters, adapts, or restores a property by adding to its value, prolonging its useful life, or adapting it for a new use. These costs are not fully deducted in the current year but are capitalized, meaning the cost is recorded as an asset and then depreciated over a set period.
For example, while patching a small roof leak is a repair, a complete roof replacement is an improvement because it extends the building’s life. Similarly, fixing a single broken cabinet is a repair, but a full kitchen remodel that adds significant value is an improvement. Improvements are reported on Form 4562, “Depreciation and Amortization,” where the cost is spread out over the asset’s useful life.
The IRS provides a de minimis safe harbor election that allows taxpayers to deduct small-dollar improvements that would otherwise need to be capitalized. Under this rule, a business without an applicable financial statement can elect to expense items costing up to $2,500 per item or invoice. For businesses that do have such a statement, the limit is $5,000. This election simplifies bookkeeping for minor purchases.
Record-Keeping for Repair and Maintenance Expenses
To substantiate the deductions claimed for repairs and maintenance, meticulous record-keeping is necessary. In the event of an IRS audit, you must be able to provide proof for each expense. Proper documentation includes dated receipts, paid invoices, and canceled checks that clearly describe the service performed. Bank and credit card statements showing the transaction can also serve as supporting evidence.
It is helpful to make notes on receipts or in a digital log specifying the exact nature of the work done. For instance, an invoice that simply says “services rendered” is less compelling than one that details “repair of malfunctioning HVAC unit.” This level of detail helps confirm that the expense was for maintenance rather than a capital improvement.