Repair Allowance

[Nashville]

Would like to revive an unanswered question from a previous thread.

I try to simplify explanations to clients about repairs. "If it is an improvement, we have to capitalize and depreciate it. If it existed prior and is just a replacement for what previously existed, it is a deductible repair."

Yet the IRS has some sort of repair allowance, where if a repair exceeds a certain threshhold of original cost, then they want it to be capitalized and depreciated. Example, a building costs $150,000 several years ago. This year, $60,000 is spent is pure repairs, no improvements. Under this "repair allowance doctrine" and a 35% allowance, the threshold would be $52,500, the entire $60,000 would have to be capitalized.

I haven't heard of IRS making audit adjustments for this sort of thing in over 30 years. Are they still doing this??

[appelman]

Have you chapter and verse on this?

I would suspect that if such a threshold exists, it is a rebutable presumption.

[Nashville]

Chapter and Verse

No Chapter and Verse - that is the reason for the question. If the mentality still exists, you would think to find it in Pub 946. In the old publications, percentage threshholds used to be listed by the Class Lives.

But before we conclude we don't have to capitalize repairs, consider the example in Pub 946 (p.13) where someone replaced a roof and we are told the new roof has to be capitalized. This be true even though the roof was simply replaced and not improved. The guiding element in their thinking was that a new roof extends the life of the old roof.

I disagree. It doesn't extend the life of the old roof. The old roof is gone. There is no improvement, and the the new roof only restores the value of the building to no more than would have been the case with the original roof at the time.

One could argue that it extends the life of the building, I suppose. If threshholds still exist, they might only appear in an audit manual. Many times IRS quits publishing things because they don't want to be definitive enough to create a "safe harbor."

So whether a threshhold exists or doesn't - are we still confronted by an auditor attempting to capitalize large repairs? Is "crossing the line" now subjective rather than defined? My original question may have morphed into a slightly different one.

[appelman]

It's an ongoing debate.

You might ask why painting is a repair, while a new roof is a capital expense. Although the roof will presumably last longer, both have lifetimes in excess of a year. I don't think there is any cut-and-dried criterion. But if you're claiming a large expense as a repair, you want to feel comfortable defending it.

[Gary2]

I look at it this way:

It's not that the new roof extends or doesn't extend the life of whatever roof. A roof replacement extends the life of the building. If you don't replace the roof, it will eventually leak, causing significant damage to the building and its contents, especially if it's a wood structure.

Painting (at least for the interior) is generally cosmetic. You can allow an interior to go unpainted with decades, and the worst that will happen is that you may accumulate dirt or stains that can't be cleaned. One might argue that paint is necessary as a preservative for some types of exterior surfaces, but I don't think anyone wants the published examples to get into such fine grained examples as saying that painting cedar clapboards is a repair but painting pine rake boards isn't.

An alternative way of looking at it is common perspective with regard to real estate. Home buyers will give significant weight to the age of the roof, heating system, etc. into their purchase decisions, but much less so to paint - they know they can put off the painting till they have the cash, but can't put off a new roof.

[Gretel]

I remembered having heard about a fairly recent option for "Repair allowance", but was not able to find it. Bumped into some other interesting things and am pasting them here for anyone interested.

http://www.irs.gov/newsroom/article/0,,id=179892,00.html

http://www.irs.gov/pub/irs-drop/n-04-6.pdf

http://www.irs.gov/businesses/articl...134133,00.html - see under "Asset Depreciation Range, last sentence of first paragraph. It appears the "optional repair allowance" is closely related to a "Cost Segregation Study".

In Northern v. Comr., TCS 2003-113, the taxpayer replaced
a leaking roof. The court held that “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.” The taxpayer
was allowed to deduct as a repair the $49,308 attributable to
the roof.