Guide to Expensing Roofing Costs: Expense vs. Capitalized

It’s clear that roofing costs can be a significant expense to a business. For tax purposes, a decision must be made as to whether the costs can be deducted immediately as a repair or must be capitalized. Since an incorrect conclusion can lead to a substantial overpayment of tax liability, we’ve outlined a series of questions to consider when evaluating roof repair costs.

What Type of Roof is It?

Roofing systems are typically divided into two classifications—steep pitch and low pitch.

Steep-pitch assemblies (typically used for residential rental properties) consist of three primary parts:

• Roof deck – The first layer above the beams, usually a wood-base material like plywood and sometimes referred to as “sheathing.”
• Underlayment – Provides a secondary weatherproofing barrier. Sometimes an underlayment is referred to as “felt” or “paper.”
• Roof covering – Can include various types of shingles, clay tile or concrete tile, slate, wood shakes or metal roof systems for steep-pitch applications.

The average lifespan of steep pitch roofing covers is:

Low-pitch roofing is typically used for commercial buildings and consists of three sections:

• Roof deck – Typically a corrugated metal panel supported by structural beams.
• Insulation – One distinction from steep-pitch roofing is that insulation is typically above the decking and may be replaced with the membrane layer.
• Roof cover – Also referred to as a membrane, most low-pitch membranes can be classified as built-up roof membranes, metal panel roof systems, modified bitumen sheet membranes, synthetic rubber membranes, thermoplastic membranes or spray polyurethane foam-based roof systems.

The average lifespan of low-pitch roofing covers is:

Apply the Regulations

Answers to the following questions will help you assess whether the roof work is a capitalized betterment:

• Why was the roof replaced? If the reason is due to sudden damage, the cost to repair the roof back to the same condition using the same materials is not a betterment.
• How much time has passed since you acquired the building and the roof work took place? If work needs to be done soon after the building was acquired it might fall into the betterment category because the work corrected a defect or condition that existed before the building was acquired. However, it generally does not fall into this category if a long period of time has passed since the building was acquired.
• What kind of roofing was there and what kind was it replaced with? If improved materials were used, taxpayers would need to focus on the expected life of the old roof versus the expected life of the new roof. For example, going from asphalt shingles (20-year life) to clay tile (50-year life) is a betterment that requires capitalization. Was improved roof material used because comparable materials were no longer available or technology has advanced? If it’s simply not practical to use the old type of roofing system, it’s generally not a betterment. If the old roof material performed worse than industry standard roofing material for a given location and building type, it’s generally not a betterment under this test. Did the roof relate to an expansion of the building? If yes, the expansion part of the roof is capitalized and potentially the entire roof system depending on the facts.

Restorations

Answers to these questions will help assess whether the roof work is a capitalized restoration:

• Why did the roof need to be replaced? If it was because of a casualty event and the taxpayer properly deducts a casualty loss by reducing the building’s basis by the amount of the loss, the cost of the new roof must be capitalized. If the building’s basis was less than the casualty loss, the excess portion is capitalized only if it meets all other criteria for improvement.
• How much of each roof layer was replaced? If only the outer roof covering was replaced, it is not a restoration. If any load-bearing structural elements were replaced that supported more than 40% of the roof, the entire cost is likely a restoration. If more than 40% of the insulation layer between the roof covering and structural elements was replaced, it may be a restoration.
• Was the roof work part of a project to return the building to its ordinary operating condition after it had deteriorated to a state of disrepair and was no longer functional for its intended use? Most building structures can continue to function as intended with some degree of roof problems (minor leaks or exterior trim damage). When the disrepair of a roof becomes significant enough to impede the normal functions of the building structure, the cost of the work must be capitalized as a restoration.
• Did the taxpayer claim a retirement loss or partial disposition deduction for any portion of the old roof? If yes, the cost of the work is capitalized as a restoration.

Larger Improvements

Answers to these questions will help to assess proper tax treatment:

• Was the roof work performed due to another capital improvement project? If the scope of any other capital improvement project required the roof work, the roofing costs would be depreciated along with the capital project. For example, installing all new HVAC units may require additional roof penetrations and changes to the roof covering. If any other capital improvement directly benefited from the roof work, then the roof work must also be capitalized. For example, replacing the roof covering with a reflective material increases solar power production. The reflective covering is not required, but directly benefits the solar panels.

Having a basic understanding of roof systems and the tangible property regulations can help building owners better evaluate the nature of the work performed. Careful analysis will produce a solid foundation for treating the cost of roofing work as either a repair expense or a capital improvement. As always, feel free to contact us with any questions.

Mitch Estling is a partner at BerganKDV. Contact him via email at mitch.estling@bergankdv.com.