Building owners often spend significant amounts to replace parts of various components of the roof system. With a basic understanding of roofing systems and tangible property regulations, tax preparers can ask interesting questions to gather facts and circumstances and assess the nature of the work performed. Careful analysis will produce sustainable foundations for properly treating the cost of roofing work as a current year repair expense or a capital improvement. The topic of roof repairs and replacement presents a long-standing dilemma for tax professionals and our customers.
In general (and most often optimally), it is expected that such repair, or even replacement, costs can be spent in the year in which they are incurred. But the analysis needed to determine what needs to be done isn't that simple, especially with the recent issuance of the Tangible Property Regulations by the IRS. For your repair and maintenance project to be deducted from your taxes, you must first capitalize on it. Especially when repair and maintenance improve the property or allow it to adapt to a new use.
The BRA test (which stands for Improvements, Restorations, and Adaptations) is one way to determine this. We spent 5 grand on repairing the roof. I'm thinking that since this is clearly a repair to the existing roof (it was leaking), there is no way we can call this capital and we need to cancel it. In many cases, if you have to do significant work on your roof and it has been approximately two years since you purchased the property, the work may qualify as an improvement because it is correcting pre-existing defects or conditions.
Temporary repair or patch work, or inspections for ongoing maintenance also fall into this category. In many cases, only part of the roofing system is replaced and, depending on the facts, those costs can be deducted as repairs. Careful analysis will produce a solid basis for treating the cost of roofing work as a repair expense or a capital improvement. Thus, for example, if you replaced an entire roof with metal shingles instead of asphalt shingles, you would increase the original value and not take a necessary step to maintain the original value.
Part of understanding when a ceiling qualifies is understanding the difference between “maintenance (an expense) and “capital improvement” (a capitalization). If there is a sudden storm that damages the roof and you are looking to repair the sudden damage, this is generally not improving the asset, but rather restoring the original value, so this will not qualify as a capital upgrade if you are going to use the same materials. Amounts paid for repair and main property and equipment are deductible if those amounts are not required to be capitalized under §1.263 (a) -3, which provides in part that any amount paid for permanent improvements or improvements made to increase the value of such property must be capitalized. In that case, when more than 50% of the roof needs to be replaced, the expense becomes an improvement compared to maintenance.
The work exposed some minor repair work that had not been anticipated, which was carried out quickly and efficiently. If this is your situation, then yes, the roof part as part of the addition qualifies as capitalization, and this can extend to the rest of the roof replacement work based on the above questions. In addition, if the original roofing material performs worse than the standard set by the industry for the type of construction, it will not be an improvement.