Repairs, Maintenance & Improvements
Tangible Property Regulations – Frequently Asked Questions
Rev. Proc. 2015-20 allows the expensing of items of $500 or less (but see a $2,500 level mentioned further below) by making a written, annual election (§1.263(a)-1(f)) to apply the de minimis safe harbor to do so. The de minimis safe harbor election permits a taxpayer to not capitalize (as equipment or similar); and permits a taxpayer to treat as materials or supplies, certain amounts paid for such tangible personal property that it acquires or produces during the taxable year providing that the taxpayer meets certain requirements and the property does not exceed certain dollar limitations ($500 $2,500 in this case, which is generally an increase from $500 previously and earlier from $200 previously).
Businesses may rely on the de minimis safe harbor only if the amount paid for property does not exceed $500 per invoice, or per item as substantiated by the invoice, as long as:
- Accounting policy: it establishes at the beginning of the tax year accounting procedures expensing for non-tax purposes de minimis items:
- costing less than a certain dollar amount, or
- items with an economic life of 12 months or less,
- Book/tax consistency: it recognizes the de minimis costs as expenses on its books and records, and
- de minimis amount: the amount paid for the property does not exceed
$500$2,500 per invoice (or per item as substantiated by the invoice) or other amount as determined by the IRS. - A written election to use the safe harbor for each taxable year in which qualifying amounts are
incurred is made by attaching a statement to the income tax return for the taxable year.
Regarding the $2.500 safe harbor limit IRS guidance is “Examiners should not negotiate with taxpayers to set de minimis thresholds beyond the safe harbor limits. A taxpayer that seeks a deduction for amounts in excess of the amount allowed by the safe harbor or by agreement with IRS examining agents will have the burden of showing that such treatment clearly reflects income.”
IRS Notice 2015-82 increases the above $500 cut-off level to $2,500 effective January 1, 2016 and it states that generally the earlier use of the $2,500 level will not be challenged during an IRS audit examination for tax years after December 31, 2011.
Rev. Proc. 2015-20 allows for the Safe Harbor Election for Small Taxpayers by making a written, annual election (§1.263(a)-3(h)) for real property. A business is not required to capitalize an improvement, and therefore, may deduct the costs of work performed on owned or leased buildings, e.g., repairs, maintenance, improvements, or similar costs that fall into the safe harbor election for small taxpayers. The requirements of the safe harbor election for small taxpayers are:
- Average annual gross receipts are less than $10 million; and
- Owns or leases building property with an unadjusted basis of less than $1 million; and
- The total amount paid during the taxable year for repairs, maintenance, improvements, or similar
activities performed on such building property doesn’t exceed the lesser of:- 2% of the unadjusted basis of the eligible building property; or
- $10,000; and
- A written election to use the safe harbor for each taxable year in which qualifying amounts are
incurred is made by attaching a statement to the income tax return for the taxable year.
Rev. Proc. 2015-56 allows for a Remodel-Refresh Safe Harbor Method of Accounting / Election for Retail stores and Restaurants for expenditures on their existing real property. A business would revoke any existing partial disposition election and then irrevocably elect to expense under §162(a) 75% of the costs incurred to remodel or refresh a qualified building. This method is in lieu of the annual §1.263(a)-3(h) election mentioned above. The filing of a Form 3115 in generally required, using designated automatic accounting method change number “222.”
Cost Segregation Studies and other information are detailed in the Internal Revenue Service Audit Techniques Guide (ATG) Capitalization of Tangible Property Treas. Reg. §1.263(a) and related regulations.
IRS Cost Segregation Guide – Chapter 7.2 Industry Specific Guidance – Restaurants
IRS Q & A Depreciation & Recapture 1 Computer and Section 179
IRS Q & A Depreciation & Recapture 2 Motor vehicles & mileage
IRS Q & A Depreciation & Recapture 3 Home Office depreciation required
IRS Q & A Depreciation & Recapture 4 Roof, gutters, windows, doors & furnace HVAC
T.C. Summary Opinion 2003-113 Thomas J. Northen, Jr., and Shirley Cox, Petitioners
Commissioner of Internal Revenue, Respondent
Docket No. 5020-02S. Filed August 13, 2003.
Section 162(a) allows the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The cost of incidental repairs to property is deductible if those repairs neither materially add to the value of the property nor appreciably prolong the life of the property.
Sec. 1.162-4, Income Tax Regs. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, must generally be capitalized and depreciated in accordance with section 167
Here, as in Oberman Manufacturing Co., there was no replacement or substitution of the roof. Petitioner’s only purpose in having the work done to the roof was to prevent the leakage and keep her commercial property in operating condition and not to prolong the life of the property, increase its value, or make it adaptable to another use. Petitioner’s expenditure merely restored her commercial property to one with a roof free of leaks. That is why she hired Armstrong and the other contractors. The reason why Armstrong sprayed the entire roof with foam was to protect Armstrong against future liability. On this record, we hold that petitioner is entitled to deduct the expenditure in issue.
The issue in this case has been considered previously by this Court in Oberman Manufacturing Co. v. Commissioner, 47 T.C. 471 (1967). In that case, the Court held that the cost of removing and replacing roof-covering material (as well as the cost of inserting an expansion joint in the roof) was a deductible expense. The Court observed that “it is necessary to take into consideration the purpose for which an expenditure is made in order to determine whether such expenditure is capital in nature or constitutes a current expense.” Id. at 482. The Court in Oberman Manufacturing Co. further observed that the taxpayer’s only purpose in having the work done was to prevent leakage and keep the leased property in an operating condition over its probable useful life and not to prolong the life of the property, increase its value, or make it adaptable to another use. There was no replacement or substitution of the roof.
Oberman Mfg. Co. v. Comr., 47 T.C. 471 (1967)
We think that the expenditure in question should properly be considered as a deductible ordinary and necessary business expense rather than a capital expenditure. The testimony establishes that the petitioner’s only purpose in having the work done to the roof was to prevent the leakage and thus keep the leased property in an operating condition over its probable useful life for the uses for which it was acquired, and not to prolong the life of such property, increase its value, or make it adaptable to a different use. There was no replacement or substitution of the roof. It is true that the work included some structural change, namely, the insertion of an expansion joint in the roof. However, the evidence establishes that was the most economical way to repair the leaks and thus keep the leased property in an ordinarily efficient operating condition. Nor in our opinion did
Oklahoma Transp. Co. v. U.S., 272 F. Supp. 729 (W.D. Okla. 1966)
As to Item (9) above, the plaintiff is entitled to claim the roof repair expense as an ordinary and necessary business expense since the evidence is to the effect that this money was spent to replace deteriorated roof decking which involved a part of the roof of one building and which condition was detected when other repairs were being made to the roof by reason of a storm. The Court finds that from the nature of this work it constituted the repair of deteriorated parts of the building and such did not appreciably prolong the original useful life of the property. Farmers Creamery Company of Fredericksburg, Virginia, Petitioner v. Commissioner of Internal Revenue, Respondent, 14 T.C. 879.
Repairs were required for sanitary, safety, and utility purposes in order to maintain and continue the efficient use of the building. Repairs were made from time to time as occasion arose during each of the taxable years, without discontinuing the use of the building. These were not made in accordance with any over-all plan. They did not require a building permit. Typical separate repairs were replacing several joists where the old ones had rotted permitting the floor to sag, replacing small portions of rotted flooring, and patching walls and ceilings. The materials used were similar to those replaced. The work was unusually expensive because of war time costs and because much of it was done on an overtime basis, so as to interfere as little as possible with the operation of the plant. The repairs never replaced as much as one-half of any wall, ceiling, or floor and they did not in any way enlarge or change the design of the building. The costs were all charged to a repair account. The repairs were solely to mend deteriorated parts of the old building in order to restore it to a sound condition. These repairs did not appreciably prolong the original useful life of the property.