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As tax time rolls around, range operators face the daunting task of separating repair and maintenance receipts from capital improvement expenses. It often appears that only the ever-vigilant Internal Revenue Service can tell the difference. Fortunately, there are some basic guidelines to help you label your costs and reap the maximum tax breaks.
 Capital expenditures. According to the tax rules, a cost is considered a capital expense if it significantly increases the value of the property or prolongs its life beyond what previously existed. Expenses that fall into this category include
• building improvements or betterments of a long-term nature,
• machinery and equipment,
• architect’s fees and
• the cost of defending or perfecting title to property.
Under the U.S. tax system, only those expenses that contribute toward earning the golf range’s income should offset the operation’s taxable income for that year. If, for example, you add tee spaces or purchase a new ball picker, the business has acquired an asset that will benefit the operation for a number of years. If you deducted the full cost of that asset in the year it was acquired, your income for that year would be understated. Your income would also be overstated for all subsequent years that the asset remains a part of the range.
Rather than allowing you to take a full deduction for the cost of any permanent assets or property (i.e., items that will benefit the business beyond the current year), the government requires such expenditures to be treated in the same manner—and deducted over the same period—as the underlying asset (i.e., depreciated over several tax years). Even though your capitalized costs are not fully deductible in the first year, for tax purposes, you will eventually recover the full cost through annual deprecation deductions. There is also a reduced amount of taxable gain or an increased amount of taxable loss to be considered when the asset is sold or otherwise disposed of.
Repairs. Any legitimate business expense that does not create an asset or benefit the golf range for a period longer than one year is considered a repair. Examples include
• re-pointing brick,
• tuck-pointing,
• mending leaks,
• routine painting,
• plastering and
• conditioning gutters on buildings.
Unlike a capital expenditure, where the tax deduction is spread out over a number of years, repair expenses are fully deductible for the tax year in which they’re incurred.
Maintenance. Any periodic expense that preserves an asset’s operational status is considered maintenance, and like repairs, these costs are also fully deductible in the same tax year. A good example of maintenance is the cost to tune up your golf cart or utility vehicle. An example of a capital expenditure would be buying a new motor for that vehicle. Technically, the expenditure does not improve or extend the life of the asset or property, although an argument can be made either way.
For many range operators and owners, the issue of whether an expense is normal and customary or more capital in nature is purely a tax question, and it’s your responsibility to classify the cost and be able to substantiate your decision.
The difference between regular maintenance and repairs and capital improvements seemingly boils down to the impact on the golf range. Obviously, if you can establish a cost as a repair or maintenance expense—money spent merely to keep the range in ordinary efficient operating condition—the necessity of long recovery periods and depreciation deductions can be avoided. Outlining a periodic schedule for maintenance and routine repairs also can help convince a skeptical IRS. And if this strategy benefits your tax bills, it can also help maximize your current tax deduction—just be sure that your accountant agrees on this course of action. |
