If you’re a small business owner, real estate investor, or recently self-employed, this is an issue that catches people off guard—often at the worst possible time.
It tends to affect:
- New or growing businesses
- Contractors and asset-heavy operators
- Real estate investors doing renovations or buying equipment
- Anyone aggressively minimizing taxes within a few years of buying, refinancing, or expanding with debt
The problem isn’t depreciation itself.
It’s understanding how tax rules and lending rules look at the same activity very differently.
A real example from 2023
In 2023, I worked with a real estate investor who owned roughly 20–30 rental units. He focused on buying older properties and doing heavy turn work—flooring, cabinetry, countertops, and similar improvements.
From a tax standpoint, most of that spending was booked as repairs. That wasn’t sloppy bookkeeping—it was intentional.
Here’s why.
Tax law draws a distinction between:
- Repairs, which are immediately deductible, and
- Capital improvements, which are added to the property and deducted over time through depreciation
By 2023, bonus depreciation had already begun phasing out. Only 80% of qualifying property was eligible for bonus depreciation, and that percentage dropped again in 2024. In that environment, expensing repairs often created a larger upfront tax deduction than capitalizing improvements subject to partial bonus depreciation.
At the time, the decision made sense. Repairs reduced taxable income faster.
The problem showed up later.
In 2024, when the client tried to refinance a property, the lender could not add those repair costs back to income. From the bank’s perspective, those weren’t non-cash accounting deductions tied to assets—they were operating expenses. Qualifying income was lower, and the refinance stalled.
Same properties.
Same cash flow.
Different accounting treatment.
Very different outcome.
Why lenders care about depreciation
Most residential lenders underwriting one-to-four-unit properties follow agency-based underwriting guidelines, even if borrowers never hear those names mentioned.
Those guidelines are built around a simple question:
Is this income likely to continue?
Depreciation matters because:
- It is a non-cash expense
- It represents the accounting write-off of an asset already paid for
- It does not affect current cash flow
Because of that, lenders are generally allowed to add depreciation back when calculating qualifying income.
Repairs and supplies are treated differently.
Even if they happened last year, lenders usually view them as recurring business costs—money that will likely need to be spent again. As a result, they are far less likely to be added back when underwriting a loan.
From a lender’s point of view:
- Depreciation looks like an accounting adjustment
- Repairs look like ongoing expenses
The de minimis trap in ordinary businesses
This issue isn’t limited to real estate.
The IRS allows businesses to adopt a de minimis accounting policy, which lets you expense purchases under a certain dollar amount instead of capitalizing them. The maximum threshold is $2,500 per item, but businesses are not required to use that limit. You can choose a lower threshold.
For example, if a business buys five $1,000 computers:
- Using de minimis, that’s a $5,000 supply expense
- Alternatively, those same computers could be capitalized and depreciated
Both approaches are allowed. The difference is a choice, not a requirement.
From a tax perspective, the result may be similar—especially now that bonus depreciation is back at 100%. But from a lender’s perspective, depreciation tied to identifiable assets is far more likely to be added back to income than a supply deduction.
Same purchase.
Same cash outlay.
Very different impact on qualifying income.
What would have changed the outcome
Looking back at the 2023 investor:
- Flooring, cabinetry, and similar work could have been carved out as five-year property
- Partial bonus depreciation would have applied
- Assets would have remained on the books
- Qualifying income would likely have been higher
The same principle applies to equipment-heavy businesses:
- Group purchases as depreciable personal property
- Depreciate instead of expensing everything as supplies
- Preserve income on paper when financing is foreseeable
This isn’t about being aggressive or conservative.
It’s about being intentional.
The mistake isn’t recklessness—it’s reactive planning
Most business owners aren’t trying to sabotage financing. They’re responding to the tax incentives in front of them.
The problem arises when tax planning happens without a timeline.
Then the banker looks at the tax return and says:
“You don’t make enough money.”
From the owner’s perspective, that feels disconnected from reality. The cash flow exists. The business is running fine. But the tax return tells a different story.
The takeaway
If financing is even a possibility in the next few years, tax planning needs to align with where you’re headed, not just what you owe this year.
Sometimes that means:
- Paying some tax
- Delaying purchases
- Capitalizing instead of expensing
- Showing assets instead of repairs
And sometimes the answer is straightforward:
If the business truly isn’t profitable, depreciation won’t change that.
But when the difference is how deductions are categorized—not whether money was made—those decisions can quietly determine whether a loan gets approved.
Want help applying this to your situation?
If you’re self-employed, investing in real estate, or running a growing business, the right tax strategy depends on where you’re going—not just what shows up on this year’s return.
If you’re planning to buy, refinance, or expand, or you’re unsure how today’s deductions could affect tomorrow’s financing, we can walk through it together. That usually means reviewing your tax return, looking at how a lender will view your income, and aligning your tax decisions with your longer-term goals.
If that sounds useful, email info@neil.tax and let me know what you’re working toward.
