We own a commercial space that is used as a simple rental warehouse. Normally, a simple Schedule E handles the income/expenses. Last year, we put a new roof on the entire building. How is that normally reported/handled ?
Depends how the "new roof" was put on.
Removing the old roof first: Capitalize and depreciate.
Pave over old roof. Repair expense.
Well, it depends but not on that. There are new proposed/temporary regs out on this issue but I haven't looked at them in detail yet.
The new proposed and temporary regulations (very similar to the old proposes regs but with a lotmore detailand examples) makes it pretty clear that replacing a roof is a capital improvement and not a repair.
Some quotes and cites from the Treasury Regs:
Accordingly, if an amount paid results in a restoration of a building structure, such as the replacement of an entire roof, then under the temporary regulations the expenditure constitutes an improvement to the building unit of property.
See, for example, Smith v. Commissioner, 300 F.3d 1023 (9th Cir. 2002) (holding that costs to replace a substantial portion of floor were capital expenditures); Tsakopoulous v. Commissioner, T.C. Memo. 2002-8 (holding that costs to replace the roof on a portion of the suites of a shopping center were capital expenditures);
Georgia Car and Locomotive Co., 2 B.T.A. 986 (1925) (holding that costs of a new roof on a building were capital expenditures). The approach for buildings is conceptually similar to the plant property rule discussed below, which segregates plant property into units of property that perform discrete and major functions within the plant.
depends what the "old roof" is. If it is just a membrane and no supporting elements, then no. Otherise, maybe.
yes.
Interesting.... will have to check and see what was really completed. Of course, the "new roof" work would be exactly the same in either case, just the difference being in the removal of the old roof.... and since this was a classic commercial building with a flat roof, underlayer, gravel, etc... not even sure what "removing the old roof" would entail.
SO - why is one effort considered a capex and the other an expense ?
just looked up the work description... looks like a "repair" -
Because the U.S. Tax Court said so and the IRS lost a case when the old roof was simply paved over.
I consider the Tax Court ruling (from 2003?) controlling, not proposed regs.
my quick reading of these very painful regs seems to show the IRS is not ignoring that court ruling:
" The roof, including the
membrane, is part of the building structure
as defined under paragraph (e)(2)(ii)(A) of
this section. Although the roof membrane
may affect the function of the building
structure, it is not, by itself, a major
component or substantial structural part of
X's building structure under paragraph (i)(4)
of this section. Because the roof membrane is
not a major component or substantial
structural part of the building structure, X is
not required to treat the amount paid to
replace the roof membrane as a restoration of
the building structure under paragraph
(i)(1)(vi) of this section."
I am not aware of any Tax Court decision in 2003 that under the law may be cited as precedent. I am aware of a TCM decision on this issue... but that can't be cited as precedent. I am only aware of TC decisions and Circuit Court decisions that are consistent with the 2008 proposed regulations and would be consistent with the 2011 temporary and proposed regulations.
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