When is it necessary to revise a depreciation schedule due to asset improvements?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
A depreciation schedule must be revised when an improvement is made to a depreciable asset because, for tax purposes, the improvement is treated as a separate asset with its own recovery period and depreciation method. The key legal and procedural details are as follows:
1. Improvements vs. Repairs:
An improvement is an addition to or partial replacement of property that is a betterment, restoration, or adaptation to a new or different use. Improvements must be capitalized and depreciated, not deducted as a current expense.- In contrast, a repair that merely keeps property in ordinary efficient operating condition and does not materially add value or substantially prolong useful life is generally deductible as a current expense and does not require a change to the depreciation schedule of the underlying asset.
2. Capitalization and Separate Depreciation:
When you make an improvement to a depreciable asset, you must treat the improvement as a new, separate asset for depreciation purposes. The improvement is depreciated over its own applicable recovery period, using the appropriate depreciation method and convention, starting from the date the improvement is placed in service.- The original asset continues to be depreciated on its original schedule, unaffected by the improvement.
3. Determining the Recovery Period and Method:
The recovery period and depreciation method for the improvement are determined as if the improvement were placed in service at the same time as the improvement itself, not the original asset.- For example, if you add a new roof to a rental building, the cost of the new roof is depreciated as nonresidential real property (39 years) or residential rental property (27.5 years), depending on the type of building, using the straight-line method and the mid-month convention.
4. When to Revise the Depreciation Schedule:
You must revise your depreciation records in the tax year the improvement is placed in service. This means adding the improvement as a new asset to your depreciation schedule, with its own basis, placed-in-service date, recovery period, method, and convention.- The original asset’s depreciation schedule is not changed, except in rare cases where the improvement replaces a major component and the original component is retired or abandoned, in which case the basis of the original asset may be adjusted to reflect the retirement.
5. Recordkeeping and Reporting:
You must keep records that clearly identify the improvement, its cost, the date placed in service, and the method and period of depreciation.- The improvement is reported on Form 4562 in the year it is placed in service.
6. Legal Authority:
IRC § 168(i)(6) and related Treasury Regulations require that improvements to property be depreciated as if they were separate property placed in service at the time the improvement is made.- IRS Publication 946 and IRS Publication 535 both confirm that improvements must be capitalized and depreciated separately from the original asset.
Summary: You must revise your depreciation schedule when you make an improvement to a depreciable asset by adding the improvement as a new, separate asset with its own recovery period and depreciation method, starting from the date the improvement is placed in service. This ensures compliance with the capitalization and depreciation rules under the Internal Revenue Code and Treasury Regulations.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
