TAXES AND PREVENTIVE

ROOF MAINTENANCE

There are so many roofing materials, procedures and concepts offered today, it is little wonder that contractors, building owners, architects, and any one else involved in preparing roofing specifications find it hard to distinguish among the various systems. The problem is particularly difficult when it comes to fixing a leaky roof in that the spectrum of options is quite broad. You can try and get by with merely patching the leaks and hope for the best or go so far as to tear off the old roof materials. Between these extremes, there are many options including several preventive maintenance procedures designed to restore the roof to a watertight condition for an extended period of time.

Debates as to the best way to fix a given roof are what gives the roofing industry is vitally. All too often, however, such discussions are limited to roofing technology and total cost. Little attention, I suspect, is given to the total cost after taxes. When the tax ramifications of the various specifications under consideration are taken into account, a strong argument arises on behalf of preventive maintenance option.

Under the International Revenue Code, expenditures for the repair of business property are deductible expenses, which may be written off in the current tax year. Conversely, expenditures, which constitute capital improvements, must be amortized over the life of the property and are recoverable annually through annual depreciation deductions. In either case the amount expended will be recovered through deductions, but the difference is the period of time over which the deductions are spread. Current expenses are 100 percent recovered over 15 years. Clearly a major tax advantage is available to the building owner if he can treat the cost of fixing his roof as a current expense rather than depreciating the cost over 15 years.

Not all roofing specifications will receive equal tax treatment. How the work is performed will dictate whether the cost can be written off in the current year or must be capitalized. Determining whether a given expenditure qualifies as a current expense or a capital improvement is not always clear, but the Supreme Court in Welch v Helvering has offered the following guideline: “A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over its probable useful life for the uses for which it was acquired. Expenditures for that purpose are distinguishable from those for replacement, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use. The one is a maintenance charge, While the others are additions to capital investment which should not be applied against current earnings.”

In applying this standard the tax authorities and the courts have consistently treated the cost of a new roof as a capital expenditure but the cost of repairing the existing roof as a current expense. Though when the contractor has torn off and replace the old roof, the building owner must capitalize the expense. On the other hand, where the contractor has merely patched the leaks, the cost is clearly a current expense.

Many roofing projects, however, go well beyond mere patchwork, but stop short of tearing off and replacing the old roof. There are many products and processes, which have a preventive maintenance quality. They are designed not only to repair existing leaks but to prevent the occurrence of additional leaks. Examples include asphalt roofing products and elastomeric coatings. None of these products would serve as a complete roofing system but all go beyond merely patching the existing roof. Should the building owner treat preventive maintenance costs as a capital expenditure or a current expense?

If we go back to the Supreme Court’s guideline, the answer to the question lies in whether such costs increase the value of the property or extend its useful life. In 1967 the Tax Court addressed this issue in the Oberman Manufacturing Co. case. In that case Oberman had taken as a current expense a $20,791 expenditure on their plant roof in Fayetteville, Arkansas. The IRS had taken the position that the cost should have been capitalized. In ruling in favor of Oberman, the court found that the company’s “only purpose in having the work done to the roof was to prevent leakage.” The court further emphasized that “there was no replacement or substitution of the roof” and that “this was the most economical way to repair the leaks” and keep the property “in an ordinarily efficient operating condition.” As to whether the expenditure increased the value of the property, the court acknowledged that the property is more valuable once the roof is repaired, but the “proper test is whether the expenditure materially enhanced the value, use, life expectancy, strength, or capacity as compared with the status of the asset prior to the condition necessitating the expenditure.”

Where the owner selects a preventive maintenance process for his roof, it would be proper for him to treat such expenditure as a current expense. His sole purpose is to stop the leakage and return his building to a watertight condition. The useful life or value of the building has not been materially enhanced. The old roof has not been replaced or substituted for the new insulation and roofing.

Treating preventive roof maintenance as a current expense is an aggressive tax position which might well be questioned by the IRS in the event of an audit. Nonetheless, the position is legally strong and ought to prevail. Once made aware of the tax advantages of preventive maintenance, the building owner’s attitude will change drastically. Rather than bemoaning the fact that he is confronted with a large and unexpected expenditure, he’ll see that his roofing work will serve not only as a rain shelter, but as a tax shelter as well.

-By Terrance Quinn, Esq.

Building Trade Journal