How Does the IRS Treat Property Repair Expenses?

Christopher Axene | November 21st, 2012

Tax treatment of property repairs has long frustrated business owners and accountants alike. The system has been confusing, hard to follow and seemingly eternally inconsistent. Recent changes to the Internal Revenue Code have streamlined the treatments of property repairs, but not all the changes are as taxpayer-friendly as you may have hoped.

Under the Internal Revenue Code, you are required to capitalize certain amounts paid to acquire, produce or improve real or tangible personal property and used in a trade or business or for the production of income. While the guidance on capitalization for the acquisition or production of new assets has not, historically, been controversial, there has been significant disagreement between taxpayers and the IRS in the past relating to “repair and maintenance” type expenditures for existing property they already own. Examples include routine reconditioning and replacement of worn parts and repairs to buildings (e.g. roofs, HVAC units, etc.).

Definition of Taxable Property

The primary reason for this disagreement stems from the fact that previously there was not a good definition of “property” for purposes of evaluating expenditures and their impact on it. For example: repairs made to a leaky roof could be expensed under a certain set of facts or could be capitalized under another. The primary issue being how extensive the repair was and whether you looked at the entire building as the property being repaired – in which case the roof repair was likely expensed – or if only the roof itself was the property. The IRS often disagreed with taxpayers on their treatment of expenditures of this nature.

To add insult to injury, if a repair rose to the level of requiring capitalization (e.g roof replacement), you were not allowed to write-off the remaining cost of the old roof that you just replaced! Under the old rules it was not uncommon for a building owner to be depreciating two or more roofs at the same time!

In an effort to bring some consistency to this area, the IRS (Department of Treasury) issued new temporary regulations effective Jan. 1, 2012. The full impact of these regulations are too numerous to fully discuss here. However, there are some important, taxpayer-favorable changes that you need to know.

Routine Maintenance Safe Harbor

First, the IRS adopted a “routine maintenance” safe harbor which allows for automatic expensing of certain expenditures occurring more than once during the depreciable life of an item of tangible personal property. This is good news, as previously these types of expenditures were often required to be capitalized.

Second, the IRS will now allow a write-off of the remaining cost of building components in the year they are replaced. Again, this is good news for taxpayers. In addition, the IRS decided to componentize a building into the general structure and nine separately identified structural components like HVAC, elevators, plumbing, etc. Compared to the ambiguity under the old rules, this is generally bad news for taxpayers since expenditures related to these separately identified building structural components will likely now be required to be capitalized.

This is just a sample of the changes made by the new regulations. While this is a good first step, it seems clear the IRS has some more work to do to achieve their goal of consistency regarding capitalization versus expensing.

Ohio Business Tax Help

Did your businesses have significant repairs in 2012?  Expecting some in 2013?  Want to make sure that you’re expensing them in the most tax-advantaged way?  Contact Rea & Associates.  Our Ohio tax services team will help you develop a strategy that maximizes your repairs and minimizes your taxes.  We’ll help you understand the new rules and their impact on your business.

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