NEW REPAIR AND MAINTENANCE REGULATIONS by Karla Hopkins

The IRS recently released tangible property regulations (1.263S-3(T)), commonly referred to as “repair” regulations. The significant areas of the regulations include standards for Unit of Property definitions (UOP) for real and personal property, improvements to property, and modifications to the rules or dispositions of property. The regulations provide a general framework for determining whether an expenditure is an improvement to property or a deductible repair. A taxpayer must initially determine the UOP and then apply a series of tests to determine if the expenditure is a capital improvement or deductible repair.

The regulations make the UOP smaller, especially for buildings. As a general rule, the larger the UOP, the more likely the expenditure will be a deductible repair because they are proportionately smaller compared to a larger UOP. As the UOP gets smaller, more expenditures become capital improvements to the smaller UOP.

In the case of a building, an expenditure is treated as a capital improvement if it improves the building structure or any individual “building system”. Building systems include water, electrical, heating, ventilation, air conditioning, gas, plumbing, elevators, escalators and fire protection and security systems. For example if changes are being made to an elevator, they are considered in relation to the elevator system and not the total building itself to determine whether to capitalize it.

Under the new regulations, where an expenditure is incurred on any building system, the expenditure must be assessed against the respective building system to determine whether the expenditure is a deductible repair or capital improvement.

The regulations outline three tests to determine if an expenditure for personal property results in a betterment, restoration or adaptation to a UOP that requires capitalization. Characterizing an expenditure as an improvement requiring capitalization depends on the facts and circumstances in each case. The regulations themselves contain over 150 examples of how to interpret and apply the new rules and should be referred to during the preplanning phase of any significant repair or restoration project.