The “Repair Regulations,” are applicable to businesses in all industries that acquire, produce, replace, or improve tangible property. Since these rules mostly affect real property, they can provide significant benefits to your clients even if cost segregation studies have already been performed. Further, the rules allow taxpayers to go back to previous years and take advantage of these changes using a Form 3115 (Automatic Change of Accounting).
Whether building expenditures are capital improvements or repair expenses.
The new regulations state that this is based on facts and circumstances. Because every situation is different, they outline a number of tests and definitions that must be considered in making this determination. The regulations provide several examples and discuss specific circumstances when it’s appropriate to expense costs for roofing, HVAC, plumbing, and windows. They also provide instances when certain remodeling projects for a retail business can be expensed.
Write-off structural components of buildings when retired or demolished.
Structural components of a building include items with a long tax life (generally 39, 27.5 or 15 years) such as roofs, HVAC systems, windows, interior and exterior walls and more. The new rules allow you to assign value to these items and write them off when replaced.
Example: Client acquired office building for $5M. Five years later they spent $1M to remodel the 2nd floor. KBKG engineers perform an Asset Retirement Study and identify $450k of 39 year items that were removed during the remodel. Client claims $369,234k of additional deductions.
“Plan or Rehabilitation Doctrine” is obsolete!
Under the old Plan of Rehabilitation doctrine, you had to capitalize any routine repair work that was performed at the same time as other major improvements. If you did not expense repair work done in the past under the old rules, you are able to claim those missed deductions without amending any tax returns.
Example:Client capitalized all $4M of “renovation” costs to their building. KBKG engineers find that $300,000 was for asphalt patchwork, painting, replacing roof tiles, certain windows, some plumbing fixtures and one HVAC unit. KBKG determines all these costs are repair expenses. Client claims an additional $292,307 of deductions.
Since anyone that renovated a building in the last 15 years can take advantage of these rules, you should immediately notify your clients of these changes. KBKG is happy to provide letter templates you can mail your clients to explain these rules.
FREE CPE Webinar
RC 101: Repair vs Capitalization.
We invite you to join our upcoming classes that go over these regulations in detail.
Go to: KBKG.com/assetretirement to see if you are eligible.