Are roofing repair costs currently deductible? For tax professionals, this question comes up frequently when we have discussions with clients regarding the tax deductibility of repairs and maintenance costs incurred in their business. “What do you mean I have to capitalize and depreciate over 27.5 years or 39 years for tax purposes” is often a stern response we get when addressing this question. The good news – with good recordkeeping and an overall understanding of what was done, we can sometimes provide our client a current tax deduction for these costs. This discussion will focus on roofing repair costs.
Replacing a substantial portion of any major component of a building meets the definition of a capital improvement. A roofing system is considered a major component because it performs a critical function to the operation of the overall building. The list below is not considered an all-inclusive list under the regulations for tax deductibility but is provided for general guidance to help develop conversations between you and your advisors to help determine the tax treatment of the costs incurred. Before a decision is made on the deductibility of the items below, a complete evaluation of your specific fact pattern must be considered.
- Understand why the roof was replaced – Generally if the expenditure was necessary because of a sudden or unexpected event – the cost to repair the roof back to its original condition is not considered a capital improvement and might be currently deductible.
- Time is on your side – If time has elapsed since the original acquisition of the building, and the work is needed to maintain the roof functionality – it often times will not meet the capitalization standard under the regulations and might be currently deductible.
- Enlargement – Under most circumstances, if the roof is enlarged, the enlarged portion of the roof would need to be capitalized under the regulations.
- How much of the roof layer was replaced – Did only minor repairs need to be made to the roof and significant repairs did not need to be made to the underlying roofing structure? Did you replace the roof membrane to fix a leaky roof with a comparable part? If so, the replacement is generally not considered a significant portion of the roof and generally does not meet the capitalization standard under the regulations. Repairs to more than 40% of the roof is generally subject to capitalization for tax purposes.
- Did the taxpayer claim a loss or partial disposition deduction for any portion of the old roof? If so, the cost of the roof work is capitalized under the regulations.
- If any other capital improvement directly benefited from the roof work, then the roof work must generally be capitalized under the regulations.
- Don’t forget about the DeMinimis Safe-Harbor Election – The regulations provide an elective exception to the general capitalization rules for taxpayers that maintain a minimum capitalization policy under which it expenses small-dollar items. A taxpayer with an Applicable Financial Statement (generally an audited financial statement) can expense items currently that do not exceed $5,000 per invoice or per item. For taxpayers who do not have an Applicable Financial Statement, the threshold is $2,500 per invoice or per item. Discussions with your advisors and auditors, if applicable, need to take place before these policies are adopted as the treatment of these items under this election need to be applied consistently for both financial statement and tax reporting purposes.
Having discussions with your tax advisor before the project, during the project and after the project is critical. This is a complex area of the tax regulations but with proper diligence, planning and documentation, favorable tax outcomes can result.
Ryan D. Gorman, CPA