Under the Final Tangible Property Regulations, generally a taxpayer can deduct repairs and maintenance expenses to tangible property when the amounts are not for an improvement. The Final Regulations, under 263a do not eliminate the requirements of Section 263A, which generally provides that a taxpayer must capitalize the direct and allocable indirect costs of producing real or tangible personal property and acquiring property for resale.
Whether a cost is deductible as a repair and maintenance expense of must be treated as a capitalized improvement has always required an evaluation of the taxpayer’s facts and circumstances, also referred to as the Facts and Circumstances Analysis. The Final Regulations has not changed the need to perform a factual analysis in certain cases.
Deduct repairs and maintenance expenses tangible property regulations
The Final Regulations provide several safe harbors and simplifying elections as alternatives to the application of this Facts and Circumstances Analysis. They are: safe harbor elections for small taxpayers, the safe harbor for routine maintenance, and the election to capitalize repair and maintenance costs. The determination of whether an expense must be capitalized under the Internal Revenue Code Section 263(a) depends on the answer to two questions. First, what is the unit of property to be analyzed for determining whether there is an improvement. Second, does work performed constitute an improvement to the relevant unit of property? Question number two will be referred to as the Improvement Analysis. Again, the first question is, what is the unit of property to be analyzed for determining whether there is an improvement? There are two main categories of property addressed in the Final Regulations. These are, first, buildings, including condominiums, cooperatives and leased buildings or leased parts of buildings. And two, property other than buildings, including leased property other than buildings, plant, property, and network assets.
Network assets, for example, are railroad tracks, and electric transmission, and distribution line or pipeline, are subject to special industry-specific rules and will not be covered during this webinar. The building and its structural components is the unit of property. Under the Final Regulations, and for these purposes only, an Improvement Analysis is applied to the building structure and each of the key building systems. The key building systems are the HVAC system, fire protection and alarm, plumbing, electrical, escalators, elevators, security, gas distribution, and other systems identified in future IRS guidance. Lessees of portions of buildings apply the Improvement Analysis to the portion of the building structure, and portion of each building system, subject to the lease. Lessors of an entire building apply the Improvement Analysis to the entire building structure and each of the key building systems.
What can be deducted?
The general rule for non-buildings is that all components that are functionally interdependent are a single unit of property. Components are functionally interdependent if the placing in service of one component of a taxpayer is dependent on the placing in service of the other component by the taxpayer. Property other than buildings include non-building real property, for example land, and tangible personal property. Plant property is defined as machinery or equipment used to perform an industrial process such as manufacturing, generation, warehousing, distribution, automated materials handling and service industries or other similar activities. An exception to the general rule of functional interdependence for plant property is that the unit of property for the plant is comprised of each component or group of components within the plant that performs a discreet and major function or operation within the functionally interdependent machinery or equipment.