Expense or capitalize roof repairs?

• Author: Whittall, Robert E.

Today, the cost of roof repairs on an average building can be six figures--and the Service will always scrutinize such a deduction. The issue of whether to capitalize or expense a roof repair has been the subject of much tax litigation over the years; unfortunately, it has not resulted in any full-proof test to determine whether to deduct or capitalize. Instead, taxpayers must determine this on a case-by-case basis. Thus, to deduct the costs of repairing a roof, taxpayers have to understand thoroughly the various standards for current deductibility and to document properly their facts.

Deductibility Standard

The initial standard for deductibility is found in Sec. 162(a), which provides, "[t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Regs. Sec. 1.162-4 expands on this for repairs, providing that taxpayers can deduct the cost of incidental repairs that neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition. This deduction is allowed provided that the taxpayer does not otherwise capitalize repair costs.

If repairs are in the nature of replacements, arrest deterioration and appreciably prolong a property's life, taxpayers can either capitalize and depreciate them under Sec. 167, or charge them against depreciation reserve (if they keep such an account). In addition, Sec. 263(a)(1) provides that taxpayers cannot deduct amounts paid for new buildings or for permanent improvements or betterments made to increase a property's value; see Regs. Sec. 1.263(a)-1(a).

Regs. Sec. 1.263(a)-l(b) further states, "[i]n general, the amounts referred to in paragraph (a) of this section include amounts paid or incurred (1) to add to the value, or substantially prolong the useful life, of property owned by the taxpayer, such as a plant or equipment, or (2) to adapt property to a new or different use. Amounts paid or incurred for incidental repairs and maintenance of property are not capital expenditures."

Perhaps the leading case in this area is Oberman Mfg. Co., 47 TC 471 (1967). In Oberman, the taxpayer leased the facilities used by its manufacturing operations. Under the lease, the tenant was required to take good care of the premises, including the buildings, and to make improvements. The tenant was also required to make promptly all necessary repairs (e.g...