Labor capitalized, paid in year after rented

[Margaret CPA in OH]

Client has several rental properties.  One was purchased Jan. 2013, underwent extensive remodeling and finally rented in December 2013.  Client had insufficient funds to pay laborers in full until February 2014.  Labor to place in service should be capitalized but they are cash basis and payment was in subsequent year after placing in service.  So does depreciation of that portion of building cost begin in 2014?  Is this a 3115 worthy issue?  Of course I began depreciating in 2013 not knowing the outstanding labor expense.

Miraculously (or sheer dumb luck) it appears as though all properties have had proper depreciation and expense of supplies and repairs, etc. per new regs except for possibly this issue.  I was convince this would be the end of me but not so bad - if this next year payment is managed.  Any pertinent advice would be welcome!

Nothing like getting the books in May....

[kcjenkins]

Since they are cash basis, and paid it in 2014, place the repairs in service in 14.  

[rfassett]

Methinks that since the monies were for the remodeling that was done in 2013 but not paid until 2014, I would add it to the depreciation schedule in 2014.

[Margaret CPA in OH]

Thanks for supporting my initial inclination although I have this nagging part of me knowing that the work was done before it was placed in service so is it something to put on 3115?  Would it be different if the payment was made 6-8 months later, more than a year later?  As it is for labor but goes to the building cost as a whole, is it still 27.5 years but begins the month of payment?  One was paid in February, one in March of 2014 both for work done over the course of the entire year of 2013 prior to renting in December 2013.  This is one case that accrual would have been nice

 

[jklcpa]

I would also start the depreciation in 2014 for the portion that was paid in that year.  I don't have a reference for you, but I believe this would fall under the definition of when the cost was "incurred", and reporting on the cash basis, that would be in the year that it is paid.  The only exception would be if the item in question was financed or put on a credit card, and in those cases the contractor was actually paid and the debtor has obligating himself for the payment.

[Margaret CPA in OH]

Thanks, Judy.  The item in question is the labor to do the remodeling of the rental.  There were no credit card or financing charges directly associated.  The client simply had insufficient cash until the following year when another property was sold.  From the Accounting Coach: Incur is...

A word used by accountants to communicate that an expense has occurred and needs to be recognized on the income statement even though no payment was made. The second part of the necessary entry will be a credit to a liability account.

So we now, as cash basis, define the expense as occurring when paid not when the work which gave rise to the expense actually took place.  The amount of the depreciation is not even material but I don't feel confident about not doing something funky with Form 3115.

[kcjenkins]

No need for a 3115 as this is not a 'change' it's just adding a new depreciable asset.