A handy guide to expensing roofing costs
Roof work can be a major project if you own commercial or residential property. Many people incorrectly assume that a substantial roof project should always be capitalized and depreciated. Often times, roofing costs can be 100% deducted in the year the work is completed. This article from a June 22 post in The Tax Advisor nicely lays out factors to evaluate in determining whether your roof work needs to be capitalized or if it can be expensed.
Each year, tax professionals who deal with real estate must evaluate the most recent building expenditures and determine which items should be written off as a repair expense or capitalized. The most common, and often significant, item that is evaluated is roofing-related work. In many cases, only a portion of the roofing system is replaced, and depending on the facts, those costs may be deducted as repairs. When compared to the alternative option of depreciating the cost over a 27.5-year life for residential rental real estate or a 39-year life for commercial real estate under the modified accelerated cost recovery system, an incorrect conclusion may lead to a significant overpayment of tax liability.
Observation: For the tax professional who has only cryptic invoice descriptions and no direct knowledge of the roof work, assembling the facts and circumstances can be a challenge. The key to properly evaluating the character and nature of the work performed is having a basic understanding of roofing systems and asking insightful questions.
This guide to expensing roofing costs provides tax preparers an outline of questions to ask clients and includes tables to reference when evaluating roof repair costs.
A capital improvement is defined as an amount paid after a property is placed in service that results in a betterment, adaptation, or restoration to the unit of property or building system (Regs. Sec. 1.263(a)-3(d)). Replacing a substantial portion of any major component of a building meets the criteria of a capital improvement. A roof system is a major component because it performs a discrete and critical function in a building structure.