Tangible Property Regulations Repairs Review Toolkit

by: Smith and Howard

February 6, 2015

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Deductibility of a repair expenditure is based on a taxpayers facts and circumstances.  Below is a series of questions to ask to finally arrive at the answer of deductibility. The following questions can help in making the determination. However, the following questions are not all inclusive and an answer to one question may lead to another question to ensure clarification and understanding of the facts and circumstances.

I. General Questions

  • Were the activities performed as a result of the taxpayers use of the property?
  • Does the expenditure keep the UOP in ordinary operational condition?
  • Does the expenditure include costs activities such as cleaning, inspecting, testing and replacement of components with comparable parts?
  • Does the taxpayer expect to incur these costs more than once during the asset’s class lift?
  • Did the taxpayer recently acquire the repaired or improved asset? 

II. What is the Unit of Property that is repaired or improved?

  • Is the repaired or improved asset real property?
    • Yes – go the Real Property subsection below
    •  No – go to Personal Property subsection below

Real Property Questions

  • What is the building structure or system repaired or improved?
  • Is the taxpayer the lessor or owner of the building?
    • Yes – go to Improvement Standards section below
    •  No – go to Leased, Co-op or Condo subsection

Personal Property Questions

  • Is the property used in a manufacturing or industrial process?
    • Yes – Is the property a network asset such as a pipeline, railroad, or power line?
    • No – Can the repaired or improved asset function interdependently? If no, expand your view of the asset until you can identify the asset and all its components that function interdependently.
    • What component or group of components performs a discrete and major function or operations?

Leased, Co-op, or Condo Property Questions

  • If lessee, what portion of building or building system is subject to the lease?
  • If the entire building is leased, then the 9 units of property for the entire building is the unit of property.
  • If a portion of the building is leased, then the UOP is the leased portion of each building structure and each building system.
  • If Co-op, is the taxpayer’s ownership interest in the entire building? 

III. Apply each improvement standard tests below to the expenditure in question relative to the unit of property.

Betterment Questions

  • Does the expenditure correct a pre-existing material condition or defect?
  • Does the expenditure result in a material addition or expansion of the asset?
  • Does the expenditure result in a material increase in quality, capacity, productivity or efficiency?

Adaptation Questions

  • Does the expenditure result in a new or different use inconsistent with the intended use when originally placed in service?

Restoration Questions

  • Does the expenditure result in replacement and loss recognition on the replaced component?
  • Does the expenditure result in a loss on the sale of a component?
  • Does the expenditure result in a basis adjustment as a result of a casualty loss?
  • Does the expenditure return a UOP to “like-new” condition after the end of its class life?
  • Does the expenditure replace a major component or substantial structural part of the UOP? 

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