Whether or not a contractor collects sales tax from a customer depends on if the work being performed is considered a capital improvement to real property, or is installation, repair, or maintenance work. This bulletin explains what type of work is a capital improvement to real property, which is not taxable. It also includes information on purchases by contractors and property owners, billing, and the appropriate use of exemption certificates.
What is a capital improvement?
A capital improvement is any addition or alteration to real property that meets all three of the following conditions:
It substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property.
It becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or article itself.
It is intended to become a permanent installation.
For example, building a deck, installing a hot water heater, or installing kitchen cabinets are all capital improvement projects. Repairing a broken step, replacing a thermostat on a hot water heater, or painting existing cabinets are all examples of taxable repair and maintenance work.
Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property, provides detailed information on various types of work that do and do not qualify as capital improvements. Since the method of installation may affect how the work is taxed, certain work will need to be looked at on a case-by-case basis.
Building materials and other tangible personal property purchased for capital improvement work are taxable, whether purchased by a contractor, subcontractor, repairman (hereafter contractor), or homeowner. The sales tax paid by contractors becomes an expense that can be passed through to the customer as part of the overall charge for the capital improvement.
Contractors do not normally sell building materials to customers without installation and, therefore, cannot use Form ST-120, Resale Certificate, to make purchases of building materials exempt from tax.
However, in certain circ*mstances, contractors can use Form ST-120.1, Contractor Exempt Purchase Certificate, to make purchases exempt from sales tax. For example, a contractor is hired to build a house, and the contract requires the contractor to provide certain freestanding appliances such as a refrigerator, washer, and dryer. The installation of these appliances does not qualify as a capital improvement, since freestanding appliances do not become part of the real property, as do building materials. The contractor can use Form ST-120.1 to purchase the appliances exempt from sales tax. However, the contractor must collect sales tax on the charge to the customer for the appliances.
Purchases of materials in one taxing jurisdiction in New York may be subject to a different tax rate (higher or lower) if the materials are later used in a different jurisdiction in New York. For additional information see Tax Bulletins Use Tax for Businesses (TB-ST-910) and Contractors - Sales Tax Credits (TB ST-130).
Exemption certificates
When performing capital improvement work, a contractor should get a properly completed Form ST-124, Certificate of Capital Improvement, from the customer (including a customer that is an exempt organization) and should not collect sales tax from the customer for the project. Receiving Form ST-124 relieves the contractor from liability for any tax due on the work. The contractor should keep this exemption certificate in his or her records to show why no sales tax was collected on the work. However, if no capital improvement certificate is received, the contract or other records of the project can still be used to establish that the work done constituted a capital improvement.
If a contractor hires a subcontractor to work on a capital improvement project, the contractor should give the subcontractor a copy of the capital improvement certificate issued by the customer, so that the subcontractor’s charges will be exempt from sales tax.
All records must be kept for a minimum of three years. Additional information can be found in Tax Bulletin Recordkeeping Requirements for Sales Tax Vendors (TB-ST-770).
Capital improvement billing
When calculating how much to charge a customer, a contractor may include the sales tax paid on building materials just like any other project expense.
Example: A contractor is hired to build a new porch for a customer, which qualifies as a capital improvement. The contractor purchases $500 of materials, including lumber, screws, and stain. The bill to the contractor might look like this:
Materials:
$500
Sales tax (8%):
40
Total:
$540
The bill to the customer might look like this:
Materials (including sales tax and mark up):
$600
Labor:
1,000
Total:
$1,600
The sales tax that the contractor paid on the materials is an expense that the contractor builds into the price charged to the customer. However, because the work is a capital improvement, there is no sales tax due on the charge to the customer.
Leasehold improvements
Additions or alterations to real property made by or for a tenant, rather than the owner of the property, may be considered to be temporary in nature, rather than permanent. As a result, certain work that may otherwise qualify as a capital improvement may not qualify if the tenant’s lease does not transfer ownership of the improvement to the property owner. For example, some leases require the tenant to return the property to its original state when the lease expires. In those cases, nothing that was installed over the term of the lease can be considered permanent, since it will have to be removed if the tenant moves. This fact means that the work performed cannot qualify as a capital improvement. See TSB-M-83(17)S, Taxable Status of Leasehold Improvements For or By Tenants, for more information.
Example: A contractor installs sinks and related plumbing fixtures for a hair salon that is a tenant in a building. Installing a sink normally qualifies as a capital improvement. However, the hair salon’s lease stipulates that the premises must be returned to their original condition when the lease ends. Because the sinks must be removed at the end of the lease, they do not qualify as a permanent installation, and their installation is not a capital improvement.
Property owners
A property owner (including a property owner that is an exempt organization) who hires a contractor to perform work that qualifies as a capital improvement should give the contractor a completed Form ST-124, Certificate of Capital Improvement. The contractor should keep the form in its records to show why no sales tax was collected on the work.
A contractor is not required to accept Form ST-124. If a contractor charges sales tax on work that the customer believes qualifies as a capital improvement, the customer can apply for a refund directly from the Tax Department. For more information, see Tax Bulletin How to Apply for a Refund of Sales and Use Tax (TB-ST-350).
As stated above, there is no exemption from sales tax on the purchase of materials used in a capital improvement project. Purchases of materials are taxable, regardless of whether a property owner or a contractor buys them.
Note: A Tax Bulletin is an informational document designed to provide general guidance in simplified language on a topic of interest to taxpayers. It is accurate as of the date issued. However, taxpayers should be aware that subsequent changes in the Tax Law or its interpretation may affect the accuracy of a Tax Bulletin. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.
The IRS indicates what constitutes a real property capital improvement as follows: Fixing a defect or design flaw. Creating an addition, physical enlargement or expansion. Creating an increase in capacity, productivity or efficiency.
A capital improvement is a durable lasting upgrade, adaptation, or enhancement of the property which significantly increases the value of the property. Often this involves structural work or restoration. A repair on the other hand includes both routine and preventative maintenance, ie.
All repairs, additions and improvements to a property used in connection with a business, or one that produces income, such as a rental, are tax deductible, regardless of whether they are capital improvements. The businessperson must declare the expense as depreciation to recover the cost.
For example, building a deck, installing a hot water heater, or installing kitchen cabinets are all capital improvement projects. Repairing a broken step, replacing a thermostat on a hot water heater, or painting existing cabinets are all examples of taxable repair and maintenance work.
Better known as capital expenditures or improvements, these can include big-deal undertakings like carpet replacement, major lighting or landscape projects, pool deck refurbishment, security system upgrades or replacements, exterior painting, painting of garages, stairways or hallways, and many more.
For example, painting the interior is not typically a capital improvement; however, repainting after a fire as part of the repair might be. Other times when a repair might not qualify as a capital home improvement are: Repairs with a useful life of less than a year.
According to the Internal Revenue Service, painting may qualify as a capital improvement if it's part of large-scale improvements to a rental property. Painting by itself, however, is generally not considered a capital improvement.
The IRS distinguishes between a capital improvement and a repair or replacement due to normal wear and tear. For example, if your refrigerator breaks after several years of service, or you have leaky pipes, those repairs are not capital improvements.
If the renovation or sale of your principal residence is the reason for the IRS audit, but receipts are unavailable, you can claim tax deductions. However, the IRS does not recognize repairing a leak, changing door locks, or fixing a window as a capital improvement.
Capital improvements boost the value of your home and enhance your property — and they can reduce the amount of tax you owe if you decide to sell. ... Capital improvements vs. routine repairs.
They also must be permanent improvements. IRS Publication 527 covers capital expenses and how to differentiate improvements from general repairs. Landscaping that betters or restores your property may be capitalized. However, the difference between repairs due to normal use and capital improvements may be a bit murky.
Between 2019 and 2021, 59% of U.S. households undertook home improvement projects, according to the American Housing Survey. In general, home improvements are not tax deductible.
These are called capital improvements. Some capital improvements include a new room, appliances, floor, garage, deck, windows, roof, insulation, AC, water heater, ductwork, security system, landscaping, driveway, or swimming pool. All may qualify as improvements as they are meant to increase the home's value.
Answer: That's a capital improvement. If you'd called an HVAC technician to fix a particular problem, that's a repair. But replacing the appliance increases the value or life of your property, Wasserman says.
Capital improvements are any upgrades or repairs that increase the value of your rental property. This can include: Replacing appliances, such as refrigerators, washers and dryers. Replacing carpeting with hardwood floors.
The idea with maintenance is you're simply returning the property to its original working condition. This means that when a water pipe breaks at your rental property, having a plumber come out to fix it will count as maintenance or repair work rather than a capital improvement.
But with that, you might be wondering: Is a bath remodel tax deductible? The short answer is no, as most remodeling projects completed at your personal residence can't be written off. However, there are certain cases that can qualify your bath remodel as tax deductible.
Yes, kitchen upgrades are generally considered to be capital improvements under the IRS's guidelines. In fact, new kitchens, new kitchen appliances and new flooring can all qualify.
Examples of capital expenditures include a new roof, appliance or flooring. A capital expenditure could also include installing a new heating and air conditioning system or doing a major overhaul of an existing HVAC system.
What are examples of expenditures that are not capitalized as part of the building? The following are examples of expenditures not to capitalize as improvements to buildings. Instead, these items should be recorded as maintenance expense. Interior decoration, such as draperies, blinds, curtain rods, wallpaper, etc.
Generally, we require replacements of major building components to be capitalized and recovered via either use allowance or depreciation expense. Major building components such as HVAC systems are in use for many years, and the costs should be amortized over the useful life.
Normal, regularly recurring repairs and maintenance to keep property in an efficient operating condition should not be capitalized. Repairs or replacements that have an effect on a capital asset's functionality or materially extend a capital asset's expected useful life should be capitalized.
But what if you don't have receipts for IRS audit? If the renovation or sale of your principal residence is the reason for the IRS audit, but receipts are unavailable, you can claim tax deductions. However, the IRS does not recognize repairing a leak, changing door locks, or fixing a window as a capital improvement.
Such items are reported as operating expenses and are not capitalized. Examples are: replacement or repair of floor covering or roofs, reconditioning by replacing small parts, painting, or regular maintenance costs.
Address: Suite 369 9754 Roberts Pines, West Benitaburgh, NM 69180-7958
Phone: +522993866487
Job: Sales Executive
Hobby: Worldbuilding, Shopping, Quilting, Cooking, Homebrewing, Leather crafting, Pet
Introduction: My name is Golda Nolan II, I am a thoughtful, clever, cute, jolly, brave, powerful, splendid person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
