Roofing Costs – Expense or Capitalize, That Is the Question!

By Steve Carter, CPA, CGMA, Principal
ASL Construction Group

The issue of roof repairs and replacement presents an age-old dilemma for tax professionals and our clients. Generally (and most often optimally), one hopes that such repair, or even replacement costs, can be expensed in the year incurred. But the analysis required to determine what should be done is not so simple, especially with the recent issuance of the Tangible Property Regulations by the IRS.

To get to the best outcome, we need to raise insightful questions with our clients regarding their roofing system.

For the purposes of this article, we will assume that our analysis of the roof system – replacement or repairs – does not include considering the load-bearing roof structure. Replacing this major component would most often result in capitalization of those costs. So we will focus on the components that sit above the load-bearing structural elements, because those judgements are more difficult.

Analysis – Questions and Factors

To best analyze the optimal and supportable tax treatment for roof costs, we need insightful information. Better information and greater understanding of the circumstances requiring the roofing costs, result in better opportunities to optimize a taxpayer’s treatment of such costs.

Included below is a link to an information Checklist that we use to walk through each client’s situation. Using this Checklist helps us help you, to make better sense of complex rules, and apply them in the most appropriate and beneficial manner to your situation.

This Checklist addresses the following questions: what type of roof are we talking about – steep-pitch or low-pitch, also known as a flat roof; is this a betterment or a restoration to the existing roofing system; and lastly, are the costs incurred a part of a larger improvement.

Please refer to the Roofing Costs Analysis Checklist.

The Checklist addresses each of these main areas described above. As you read through it, you can see from the various questions posed, that we can arrive at a supportable conclusion as to how best to treat these costs, i.e. capitalize, expense, or possibly a combination of the two.

Not all costs to repair, replace, or enhance a roofing system are created equal, so a thorough analysis is the best way to go. Having us ask the right questions will go a long way in optimizing favorable tax treatment. Roofing costs can be substantial, and so can be the effect on your tax situation. Gathering the facts, assessing your building’s particular circumstances, and evaluating the nature of the work performed will produce a supportable position for treating the cost of roofing work as either a current year expense or a capital improvement. One of our Real Estate and Construction Tax Specialists will be happy to meet with you to answer any questions and discuss your particular situation.