Understanding the IRS Guidelines and the Benefits and Limitations of Capitalizing Landscaping Costs

As a commercial property owner or facility manager, maintaining your exterior spaces is vital to creating a welcoming and attractive environment for your customers and employees. But did you know that capitalizing your landscaping costs can provide tax advantages and improve your financial reporting? This article will explore everything you need to know about capitalizing commercial landscaping costs and how it can benefit your business.

What is Capitalization?

Capitalization is an accounting technique that enables some expenditures to be documented as assets rather than expenses on a company’s income statement on the balance sheet. As a result, capitalization more accurately reflects a company’s financial situation by allocating the cost of an expense over the asset’s useful life. This allows companies to improve their financial metrics, such as return on assets (ROA) and return on equity (ROE), by capitalizing expenditures.

IRS Guidelines

Certain landscaping expenses are regarded as capital expenditures by the IRS and are allowable for capitalization by companies. For example, some capitalizable gardening expenses are installing new plants, hardscaping, and irrigation systems. However, expenses related to ongoing maintenance, such as mowing, fertilizing, and pruning, cannot be capitalized. To capitalize on landscaping expenses, accounting and facility managers must adhere to strict guidelines, such as figuring out the asset’s useful life and the allowable depreciation expense. 

Examples of Capitalizable Expenses

Building walkways, retaining walls, and patios, implementing irrigation systems, landscaping design, and adding drainage are all examples of landscaping expenses that can be capitalized. In addition, any expenditure with a useful life of more than a year and expected to benefit the company long-term can be capitalized. This way, companies can improve the customer experience while spreading the cost over several years and reducing their taxable income by capitalizing on these expenses.

Limitations of Capitalization

There are several limitations when considering capitalizing on your commercial landscaping costs. Firstly, the landscaping cost must be significant enough to warrant capitalization. Generally, if the price is less than $2,500, it can be expensed in the year it was incurred. 

Additionally, the landscaping must have a useful life of more than one year to be capitalized, and recurring maintenance costs should be expensed rather than capitalized. 

Timing is also essential; landscaping costs should be capitalized during the construction or renovation of a property, but if incurred after the property is placed in service, they should be expensed. Finally, capitalizing landscaping costs may have tax implications and affect your financial statements. Therefore, it is always advisable to consult a qualified accountant or tax professional to determine the appropriate accounting treatment for your situation.

Glancing At The Facts

Capitalizing on your landscaping expenses can be a smart financial move for your facility maintenance program, but carefully considering the advantages and drawbacks is crucial. To ascertain whether capitalizing your landscaping costs makes sense for your company, consider speaking with a certified accountant or financial adviser. You can choose what best serves your company’s bottom line by being aware of IRS regulations and capitalization’s potential advantages and restrictions.