According to the IRS, capital improvements are expenses applied to the structure or “key building systems” of your property. Under these rules, a new roof is very likely to be counted as a capital expense because a large part of the building's structure is being altered, but the capital expenditure label is not guaranteed. If so, the cost of the roofing works is capitalized as a restoration. The issue of roof repair and replacement presents an age-old dilemma for tax professionals and our clients.
In general (and most of the time optimally), it is expected that such repair, or even replacement, costs can be accounted for in the year in which they are incurred. However, the analysis needed to determine what needs to be done is not that simple, especially considering the recent publication of the Tangible Property Regulations by the IRS. Determining if replacing a roof is a capital improvement or a maintenance expense can be complex. When evaluating this problem, it is important to have a basic understanding of the physical characteristics of common roof systems. To determine if replacing a roof is a major improvement, it is essential to differentiate between “maintenance” and “capital improvement”.
In many cases, only part of the roofing system is replaced and, depending on the facts, those costs can be deducted from repairs. Not all costs of repairing, replacing, or upgrading a roofing system are the same, so a thorough analysis is best. Usually, if it was due to sudden damage, the cost of returning the roof to the same condition with the same materials is not an improvement. A capital improvement is defined as an amount paid after a property is put into service and that results in an improvement, adaptation or restoration of the property unit or building system (Regs.
Building owners often spend significant amounts to replace parts of various components of the roof system. The roof structure usually includes some type of roof that encompasses a network of structural beams and joists that support loads. A careful analysis will provide sustainable reasons for properly treating the cost of roofing works as a repair expense for the current year or as an improvement of capital. If it was due to a fortuitous event and the taxpayer adequately deducts a fortuitous loss by reducing the base of the building by the amount of the loss, the cost of the new roof must be capitalized.
The key to properly evaluating the nature and nature of the work performed is to have a basic understanding of roofing systems and to ask interesting questions. Gathering the data, evaluating the particular circumstances of your building and evaluating the nature of the work performed will provide a strong position to treat the cost of roofing works as a current year's expense or as a capital improvement. A roofing system is an important component because it plays a discrete and critical role in the structure of a building.
