What expense category is Building Fund Expenditures?

For a church or nonprofit organization, undertaking a major building project—whether it's a new construction, a significant renovation, or a capital improvement—is a monumental step, often funded by a dedicated building fund. The expenditures from this fund cover a wide range of costs, from architectural plans and building permits to construction materials and labor.

A common and critical tax error is to treat these payments as regular, currently deductible expenses. The IRS, however, views all costs associated with creating or improving a long-term asset as capital expenditures. This guide will explain how to correctly categorize building fund expenditures to ensure your organization's financial reporting is accurate and compliant.

Building Fund Expenditures Category

The costs you incur for major renovations, new construction, or capital improvements are capital expenditures. They are not a currently deductible expenses.

According to the principles in IRS Publication 535 and IRS Publication 946, any cost that adds to the value of a property, substantially prolongs its useful life, or adapts it to a new use must be capitalized. 

This means the costs are added to the basis of the property and are recovered over time through annual depreciation deductions.

Important Considerations While Classifying Building Fund Expenditures

The most critical factor is distinguishing between a currently deductible repair and a capital improvement that must be added to the building's value.

Repair vs. Improvement

IRS Publication 535 provides a clear framework for this distinction:

• Repair (Deductible Now): A repair keeps your property in its ordinary operating condition (e.g., fixing a leak, repainting a room).
• Improvement (Capitalize): An improvement results in a betterment, restoration, or adaptation of the property. A new roof, an HVAC system replacement, or a new building wing are all examples of capital improvements whose costs must be capitalized.

All Project Costs Are Capitalized

The capitalized cost of a building project includes more than just the construction itself. You must add all direct and indirect costs to the property's basis, including:

• Architectural and engineering fees.
• Site preparation and land clearing costs.
• Project-specific permit and inspection fees.
• Builder's risk insurance premiums.
• The cost of construction materials and labor.

The Uniform Capitalization Rules (UNICAP)

As an organization producing real property, you may be subject to the uniform capitalization rules detailed in Publication 535. This requires you to capitalize all direct costs and a portion of your indirect costs that are allocable to the production activity.

Tax Implications and Recordkeeping

The tax treatment for these costs requires capitalization and depreciation, not a standard expense deduction.

How to Report the Costs

For organizations that file a Form 990, the capitalized costs are not reported as an expense in the year they are paid. Instead:

1. Capitalize the Cost: The total project costs are recorded as a fixed asset on the Statement of Financial Position (Balance Sheet), Part X.
2. Report Annual Depreciation: The annual depreciation deduction for the building is calculated and reported on Part IX (Statement of Functional Expenses), Line 22, Depreciation, depletion, and amortization. This depreciation is then allocated across Program, Management and General, and Fundraising functions.

What Records to Keep

You must maintain meticulous records to substantiate the total capitalized cost of the project. This includes:

• All contracts with architects, engineers, and general contractors.
• All permits, inspection reports, and project plans.
• Invoices for every cost associated with the project, from materials to labor.
• Proof of payment for all expenditures.

How Fyle Can Automate Expense Tracking for a Building Fund

Fyle helps you capture and organize the high volume of costs associated with a construction project, providing a clean and compliant record for your accountant to handle capitalization.

• Track the Entire Project: Code all invoices and payments to a single building fund project for precise cost aggregation.
• Centralize All Project Documents: Forward or attach your contractors and architects' invoices and plans directly to Fyle for automatic capture.
• Create a Clear Audit Trail: Fyle maintains a time-stamped, unalterable record of all project costs, crucial for substantiating the asset's basis.
• Automate Your Accounting: Sync capitalized project costs to the correct fixed asset or work-in-progress account in QuickBooks, Xero, NetSuite, or Sage Intacct.