Tangible Property Repair Regulations

Tax court decisions, which have changed the way companies treat improvements to tangible property, are generating significant tax benefits for many business owners.

To put it simply, the IRS has placed new regulations on what you can expense and what you should capitalize. For example, recent cases have allowed companies to expense substantial roof repairs or replacements upwards of $500,000 that would have previously been capitalized.

The determining factor lies in the reason for certain repair costs rather than the amount spent on those repairs. It also takes into consideration what makes up a unit of property. The new regulations are complex. ETS professionals are proficient at evaluating these rules and applying them to your tangible property and repair and maintenance items to provide a “clean start.” You benefit by gaining a significant increase in cash flow.

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Tangible Property Repair Regulations Considerations

Through a thorough analysis of your expenses for repairs and maintenance, ETS can help you reduce your tax liability and improve cash flow by properly reclassifying these expenditures.

Engineered Tax Deductions vs. Capitalization Studies

First, we will identify which asset costs are not properly classified, then reclassify them as deductible repairs as defined by IRS Code Sections 162 and 263. Deductible repairs may include “incidental repairs” that help to maintain an efficient operating condition but do not necessarily prolong its life, add material value or adapt the property for new or different use. Expenses incurred or paid for incidental repairs and maintenance are not considered as capital expenditures and may be reclassified to accelerate deductions in the current year.

Disposition Studies for Tangible Property Write-Offs

At ETS we also provide disposition or abandonment studies to identify old building components that were not removed from a taxpayer’s books when they were retired. IRS regulations (T- Regs) provide detailed guidance on how to dispose of these assets and encourage taxpayers to take these additional write-offs annually as they improve tangible property. Without an engineering-based cost segregation study, this is difficult to do. So the application of our engineering studies has become more beneficial than ever! Give us a call for a free no-risk benefit analysis.

Maintenance and Repairs Can Reduce Taxable Income

If you perform regular maintenance and repairs to your assets, you may be able to recapture thousands of dollars by reclassifying improperly classified capital expenses as deductible costs to accelerate depreciation. Through IRC Section 481(a), routine and incidental repairs, as well as maintenance costs, may be adjusted to reduce taxable income in the current tax year and increase any net operating loss (NOL) for a potential carry-back up to five years.

Capital Expenditures vs. Deductible Repairs

Capital expenditures include those for building improvements or other long-term betterments, new equipment, architectural fees—even the cost of defending or perfecting your title to the property. Generally, a capital expenditure either adds an asset or increases the value of an existing one. Whether it’s a deductible repair or a capital improvement often depends on the context. For example, if an item of expenditure is part of a general plan of rehabilitation, modernization or renovation to equipment or other business property, it usually must be capitalized even though by itself it would be currently deductible.

According to IRS Code, you must capitalize expenses that:

  • Substantially prolong useful life (including replacement of deteriorating assets)
  • Materially increase value
  • Adapt the property to a new or different use

On the other hand, you are allowed to deduct fees and expenses related to routine repairs and maintenance that help maintain the property in efficient operating condition. You can deduct the cost of parts and labor to repair or maintain your business assets, provided that this expense does not increase the value of the asset or prolong the useful life of the asset.

Deductible Tangible Property Repair Expenses May Include:

  • Roof repairs
  • Replacing lighting
  • Resurfacing parking lots
  • Replacing doors and windows
  • Resurfacing interior or external floors
  • Painting (interior or exterior)
  • Rekeying locks

Tangible Property Repair Regulation: Examples of Potential Savings Opportunities (assuming a 35% tax rate)

A variety of industries may benefit from these rules, including those in the banking, retail, hospitality, manufacturing, pharmaceutical, warehouse, distribution and utility industries — to name a few. The rules may apply to most capital-intensive companies that invest significant dollars in routine and incidental repairs and maintenance expenses.

Mis-Capitalized R&M Expenditures$3,134,215
Tangible Property Regs for Year 1$696,267
Dispositions$28,180
Total$3,858,662

Learn more about ETS’ Tangible Property Repair Regulation Services Today

Find out more about our tangible property repair regulations analysis, please complete the form below or contact Engineered Tax Services at (800) 236-6519.

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