January 14, 2015
All regulations relating to tangible property expenditures are now final, with mandatory compliance starting in 2014. These regulations open the door for taxpayers to expense certain items and to recognize tax write-offs for partial disposals of retired assets.
Here are the regulation related issues regarding roofing work:
A betterment occurs when a replacement results in a material increase in efficiency, strength or quality; or when an expenditure corrects a pre-existing material condition or defect.
Example: An energy efficient roof membrane is installed, resulting in a 50% reduction of energy savings for the building. This membrane must be capitalized and depreciated.
Example: A building is purchased with a worn or leaking roof. The replacement costs must be capitalized.
A betterment does not occur when a new membrane replaces an existing membrane that was comparable when it was placed in service.
Example: A building is purchased with a roof membrane that is in good condition and functional. Over time, the membrane begins to wear, and leaks occur. A new comparable membrane is installed. It does not create a material increase in energy efficiency or increase the value of the building. It merely restores the roof to its original condition. This membrane may be expensed.
A restoration occurs when a major component or substantial structural portion of a building system is replaced.
Example: A roof begins to leak. Upon examination, the contractor determines that the decking has rotted. They replace the entire roof, including the decking, insulation, asphalt and coatings. The entire roof is a major component and substantial structural part of the building structure, and therefore the replacement must be capitalized and depreciated.
A restoration does not occur when a new membrane replaces an existing membrane that was comparable when it was placed in service.
Example: A building is purchased with a roof membrane that is in good condition and functional. Over time, the membrane begins to wear, and leaks occur. A new comparable membrane is installed. A membrane alone is not a major component or substantial structural part of a building structure. This membrane may be expensed.
When a replacement must be capitalized, the new regulations allow, in most cases, the taxpayer to claim a loss upon the disposition of the retired components. Specialized methods must be used to determine the basis for such dispositions. Harbor Tax Group has the experience necessary to determine a partial disposition’s basis.
Late partial dispositions (disposals made in prior years, not recognized) are available on 2014 tax returns. These late write-off can be substantial, and are only available through December 31, 2014.
Our services involve the combined efforts of our seasoned tax professionals and engineers with extensive tax expertise, industry knowledge, and accounting skills. All engagements are performed under the direct supervision of Cathy Harris, a CPA and certified member of the American Society of Cost Segregation Professionals. Cathy has over 19 years experience in tax and over 14 years experience in cost segregation. She has followed the proposed changes in the tangible property regulations since 2006, when they were first released. In addition, Cathy has spoken at numerous local and national seminars on these regulations and has become an authority on the subject.