written by Kevin Hogan
Starting this year, building owners are challenged with a new set of rules for deciding whether amounts spent to improve their property should be written-off as a repair in the year incurred, or capitalized and depreciated over a number of years.
The most significant rule change, by far, requires property owners to separate out their building into specified component parts when considering the effect the expenditure has on the building, as opposed to the building as a whole. The separate component parts of a building, called “units of property” (UOP) are as follows:
(1) Primary Building Structure (including roof, walls, floors, doors, ceilings, windows)
(2) Building Systems:
- HVAC systems (including motors, compressors, boilers, furnace, chillers, pipes, ducts, and radiators)
- Plumbing systems (including pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste to and from the property line)
- Electrical systems (including wiring, outlets, junction boxes, lighting fixtures, and site utility equipment used to distribute electricity from property line)
- Fire protection and alarm systems (including sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping and plumbing, visual and audible alarms, alarm control panels, heat and smoke detection devices, fire escapes, fire doors, emergency exit lighting and signage, and firefighting equipment such as extinguishers, hoses)
- Security systems for the protection of the building and its occupants (including window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, related junction boxes, associated wiring and conduit)
- Gas distribution systems (including associated pipes and equipment used to distribute gas to and from the property line)
- Other structural components identified in published guidance that are excerpted from the building structure
This multiple UOP concept for buildings as provided under the new rules presents a significant change from the previous rules. For example, amounts spent to replace an air conditioner compressor under the old rules may have qualified for a repair deduction. Under the new rules, the compressor replacement is likely required to be capitalized to the building. The new rules, however, do provide that the retirement of a UOP component is a disposition. Therefore, the remaining cost basis in the original air conditioner compressor can be written off. In effect, the taxpayer does not have to capitalize and depreciate expenditures for both the removed and the replaced compressor.
Building owners should be aware of the new UOP building component rules. Rather than simply capitalizing an improvement to “building improvements,” a new asset for any of the nine defined building systems should be specifically set up in the company’s fixed asset tracking system. Also, building improvement expenditures requiring capitalization may allow for the write off of old building components. A reasonable method should be developed that will be consistently applied in the future when determining the basis of an old building component.