water well repair or upgrade?

[Catherine]

Ah, the tricky issues always wait until the very end, don't they?

Client in a rural area; has well water. Well is on the other side of a state highway from the house. The copper lines from the well to the house were leaking very badly; both water quantity and quality were suffering, plus all the water under the highway wasn't good for the road, either. 

Home-based business so at issue is Form 8829 treatment of the expense. In the end, a new well was not needed. Old well was repaired and lines replaced - "upgraded" in the sense that heavier gauge of pipe is now required by code. Materials cost was the smallest part of overall. Drilling, excavating, sideways drilling under the two-lane state road, plumbing, refilling all the excavated areas. Total cost over $20,000. (Ouch!)

Repair (restoration to function, of water to the house)? Or does it need to be capitalized because of the cost?

[Margaret CPA in OH]

Referring to one of my handy dandy charts, I see this as a betterment (ameliorates a material condition or defect) or, depending on materiality, to be capitalized.  I'm not sure how you would determine the materiality of the unit of property, though, even as it seems to be a building system, i.e., plumbing.  Either way, my chart points to capitalization depending on materiality which may be a challenge to calculate given that percentage of the home office relative to the entire property.  I am assuming that the water source is not exclusive to the home office.  Given the extent of the work and material involved, I would not think just a repair.  Just my opinion, ymmv.

[Lee B]

Sounds like repairs to me

[schirallicpa]

Did it extend the life of the home? 

I think I would lean towards expense.  This wasn't something they set out to do to extend life of the home.  Maybe their own lives will be extended, but not the integrity of the structure of the home. 

[Catherine]

Thank you @Lee B and @schirallicpa - this did not extend the life, but rather restored the water supply to the house so that it was livable. I don't agree with @Margaret CPA in OH as it was not amelioration of a defect but rather repair of pipes that just plain old wore out and started leaking. They did not have to dig a new well (determined after the existing well was evaluated). Whole issue was the location of the leak (from the well to the house, under the state highway) leading to the huge expense. I didn't think, and found nothing to support, a requirement to capitalize it simply based on how much it cost, but wanted to run it by fellow experts before making a final determination. Probably confused in my mind by the initial concerns, last summer, of possibly needing a new well, too. 

 

[Margaret CPA in OH]

Obviously all y'all's mileage varied from mine.  I do wonder about the rather small (I assume) percentage of the expense will relate to the home office.  Glad I don't have this problem with enough of my own!

[Lion EA]

The upgrade in pipes pushes me toward Capitalize, but isn't there a Safe Harbor based on some % (2%?) of unadjusted basis of house? The $20,000 might fit under that Safe Harbor to give you a firm authority for Repair.

The IRS FAQs aren't bad and contain examples: https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Aregulatoryframework

[Lee B]

The well equipment wasn't replaced or refurbished, it was repaired so from my point of view

the pipe replacement did not extend the life of the overall water system, it just stopped the leaking.

[Lion EA]

Was it only the pipes that were replaced? And only up to code, nothing fancy? No pump or mechanical equipment or holding tanks or anything inside the house? Not all or substantially all of the plumbing?

Then, I'm on the side of Repair.

You can elect to Capitalize, if they expect their income to be higher in the future...

[Sara EA]

As I understand it, water is not an allowable expense for a home office. (It is for home day cares and home-based hair salons.) The repair is not relevant to the business, just like having the pool cleaned is not.

[DANRVAN]

11 hours ago, Sara EA said:

As I understand it, water is not an allowable expense for a home office.

That is an excellent point Sara.  I have never thought about it, but it certainly follows the meaning of sec 280A (c)(1) "apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis—"

 

[Catherine]

19 hours ago, Sara EA said:

As I understand it, water is not an allowable expense for a home office. (It is for home day cares and home-based hair salons.) The repair is not relevant to the business, just like having the pool cleaned is not.

The home is not livable without water. Water as a utility cost is allowable on Form 8829 as a utility cost, just like oil, gas, electricity.

[Catherine]

On 4/9/2025 at 2:28 PM, Lion EA said:

And only up to code, nothing fancy?

Additional cost of heavier-gauge pipes was a couple hundred bucks over the many thousands of dollars in cost. The huge cost was the sideways drilling under the state highway without disturbing traffic or the roadbed. Plus, that heavier gauge is now required by code. Old pipes were very old, and might even have pre-dated the paving of that road decades ago. 

[Slippery Pencil]

14 hours ago, DANRVAN said:

 it certainly follows the meaning of sec 280A (c)(1) "apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis—"

How does 280A (c)(1) indicate that water is not a deductible home office expense?

[DANRVAN]

15 minutes ago, Slippery Pencil said:

How does 280A (c)(1) indicate that water is not a deductible home office expense?

Unlike electricity, gas, or heating oil, water is not allocable to an area used exclusively to the home office.

There is direct benefit from the the utilities used to power, heat or cool the home office as ordinary and necessary expenses; the home office consumes a portion of those utilities and they are rightfully allocated per the code section.

On the other hand, how much water is used as an ordinary and necessary expense in a home office?   

Notice that pub 587 does not include water as a utility allocable to a OIH:

Utilities and services.    Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. However, if you use part of your home for business, you can deduct the business part of these expenses. Generally, the business percentage for utilities is the same as the percentage of your home used for business.

Bottom line, water is not a cost of using a OIH so it is not allocable.

 

 

 

[Slippery Pencil]

Pub 587 doesn't exclude it either.  "Such as" means it's not an all inclusive list.  Since it does include utilities, and water is a utility, it can be argued that the pub does include it.  Water may not be deductible, but it cannot be logically concluded from the pub that the "bottom line, water is not a cost of using a OIH so it is not allocable".

The OIH FAQ does include water, https://www.irs.gov/pub/irs-regs/office_in_the_home_faq%26av1.pdf
Partially Deductible
Real estate taxes
Mortgage interest
General repairs to home
Water, sewer, garbage
Home insurance
Rent
Depreciation on home
Security system
General repairs to home

The FAQ doesn't include gas, electric, or utilities.  If we go with the all inclusive view, then water, sewer, & garbage are the only OIH deductible utilities based on the FAQ.  Thus we have conflicting guidance from the irs, neither of which is authoritative.  So what do we do?

 

[DANRVAN]

6 hours ago, Slippery Pencil said:

concluded from the pub that the "bottom line, water is not a cost of using a OIH so it is not allocable".

That was not a conclusion based on the pub (which is not an authoritative cite) but on the code.  FAQs are also not authority, and some have been proven wrong in the past.

The average US household water usage is supposed to be about 300 gallons a day, how much of that is consumed in an an area dedicated 100% to an OIH as an ordinary and necessary business expense?  For mine, I have to say about zero.  Therefore it is not an allocable expense per the code.  

16 hours ago, Catherine said:

The home is not livable without water.

But that does not make it an ordinary and necessary business expense.

And I am not worthy to cast the first stone in this case.  We have a separate electric meter on our well.  I have always included that as part of OIH utility cost; at least up until now.

After reading the code and understanding the word "allocable" in accounting terms; and knowing our daily water use is about 100% personal for washing clothes, showers, watering lawns, washing vehicles ..etc, I cannot deduct it in good conscience.

But as Sara pointed out, if we were running a daycare the cost of water would be an "allocable" expense.

 

[Lee B]

 

Who knew that whether or not water can be deducted with respect to "office in home" would be so entertaining 

 

[mcbreck]

All those water lines being replaced is similar to having all the wiring replaced in a home - capitalized. I'm willing to go out on the line and say that if you asked the plumber (or whoever) if they improved the quality of the system so that it could handle greater water flow or pressure in the future (new / bigger pump) - they would say yes. That's an improvement and capitalized.

But on the other hand if you expense it as a repair - I doubt it will get flagged by anyone as it would take a real investigation to prove it is false.

(In my area, if you don't have water then you aren't getting an occupancy permit. They aren't running a business out of the home without water.)

Back in the early 80's my dad's sales company was audited. The only thing they found was that the work done to a printer should have been capitalized instead of calling it a repair because it increased the quality of the printer. Nobody could say how it was increased (it was a high speed dot matrix printer) but the IRS deemed it to be so.

 

[Slippery Pencil]

1 hour ago, DANRVAN said:

That was not a conclusion based on the pub

And yet you never mention any code or anything about the code.  You stated a position from the pub.

[DANRVAN]

6 minutes ago, Slippery Pencil said:

And yet you never mention any code or anything about the code.  You stated a position from the pub.

 I have referred to the code throughout this thread which refers to an "allocable" expense.

"Allocable" is an an accounting term that relates to cost,  benefit, or usage.

How can you allocate an expense which is basically 100% for personal use (as in the case of the water usage) as on ordinary and necessary business expense?   Unlike electricity which is an ordinary and necessary expense for the OIH.

It is not the same as an office in town where a restroom is necessary.  Whereas the bathrooms in our home are not part of the OIH and the water used in them is  not deductible.

 

[DANRVAN]

1 hour ago, mcbreck said:

All those water lines being replaced is similar to having all the wiring replaced in a home

But different in the case of an OIH.  The wiring provides electricity which is an ordinary and necessary allocable expense.

The water lines provide an expense which is most likely used 100% personal in the residence; and zero to the exclusive OIH portion.

[mcbreck]

36 minutes ago, DANRVAN said:

But different in the case of an OIH.  The wiring provides electricity which is an ordinary and necessary allocable expense.

The water lines provide an expense which is most likely used 100% personal in the residence; and zero to the exclusive OIH portion.

How do you know what the business is? They could be dog groomers, hairdresser, art / pottery classes. You are making lots of assumptions.

[Lee B]

This discussion is now to the point where I have a huge smile on my face

[DANRVAN]

9 minutes ago, mcbreck said:

How do you know what the business is?

I did say "most likely", which is the case of a traditional OIH, and yes I made that assumption from the OP, shame on me.