Life is certainly unpredictable but – as the saying goes – you can always count on death and taxes. However, if you know the laws well enough, you can reap the rewards of a tax incentive program. Construction projects, whether a small renovation or large-scale new construction, are costly and time consuming, so knowing how you can recoup money via tax relief programs could be the difference between a project moving forward and one that stalls forever.
Replacing an aging roof is an expensive capital improvement projects for a commercial building – one that needs to be done every 15-20 years for a TPO/membrane roof and 30-4 years for a quality metal standing seam roof system.* So how do you know if your project will qualify for tax relief? Our partners at Butler Manufacturing teamed with Real Property Tax Incentives (RPTI) to create a guide that covers how to evaluate the process, which is detailed below:
How to determine if a building can be deducted
In terms of repairs or expenses, a building is considered a unit of property. According to tax laws, if a component of a unit of property is replaced, it can be eligible for a deduction – as long as it meets several requirements. Three tests determine whether the project is considered a capital expense or a deduction.
- The Betterment Test
A roof’s functionality, materiality, performance, and efficiency will determine if a tax betterment applies; if the building was improved (or bettered), rather than just repaired, and the lifespan increased, the project would not be eligible for deduction.
- The Restoration Test
A restoration change implies that the project was done to extend the useful life of the property or to increase its value. A stand-alone roof replacement would generally be considered to extend the useful life of a building and would be considered a capital expense.
- The Adaptation Test
The building is being adapted for a different use or there is a plan of rehabilitation, modernization, or improvement and the roof is replaced in conjunction with those changes. For example, if an old mill building is adapted in residential condos and the building’s roof is replaced, then the cost of the roof can be deducted.
Roof Structure and Material Replacement
- Similar Roof Replacements – roofs replaced in similar form and function, with essentially the same materials, can be deducted. E.g., low profile metal over metal retrofits are non-betterment can be deducted; however, flute filled insulation with TPO over a metal roof is not a similar roof replacement, so it would be considered a capital improvement.
- Complete New Roof System – this would include any roof with new material and/or different performance features with completely different functionalities. E.g., a slope build-up system that enhances the appearance of the facility is considered a betterment, thus not eligible for deduction.
The rules for tax deduction can be complicated and difficult to interpret. In order to ensure you’re maximizing your deductions and not miscategorizing your projects, be sure to consult with the experts. Senate, in conjunction with Butler Manufacturing, works with our clients throughout the entire project lifespan – from site selection, permitting, and preconstruction straight through to close out and maintenance. For more information, reach out to us today!
*Of note, the Federal Government is currently looking to define the taxation requirements permitting repairs, maintenance, and replacement of roofs to be expensed, rather than capitalized and depreciated over a 39 year period. Until this tax rule has passed , property owners can capitalize on the available roof repair deductions.