Routine Maintenance Safe Harbor Under IRS Repair Regulations

Repair versus improvement? Final IRS repair regulations provide business owners with safe harbors for current deductions.

The massive IRS repair regulations that went into effect in 2014 contain special rules, including new safe harbors, that can be particularly helpful for residential landlords. One of these is the routine maintenance safe harbor. (IRS Reg. § 1.263(a)-3(i). ) Expenses that qualify as routine maintenance under this provision of the new regulations are automatically deductible in a single year, even if they would otherwise qualify as improvements that ordinarily must be depreciated over several years. However, there are some significant limits on when business owners (including residential landlords) can use this safe harbor.

What Is “Routine Maintenance”?

Routine maintenance consists of recurring work a building owner does to keep an entire building, or each system in a building, in ordinarily efficient operating condition. Under the IRS’s regulations, a building includes the building structure as a whole and nine separate systems.

Routine maintenance includes two activities:

  • inspection, cleaning, and testing of the building structure and/or each building system, and
  • replacement of damaged or worn parts with comparable and commercially available replacement parts.

Example: Howard buys an apartment building that contains an HVAC system that requires maintenance by an outside contractor every four years. This includes disassembly, cleaning, inspection, repair, replacement, reassembly, and testing of the HVAC system and many of its component parts. If inspection or testing discloses a problem with any component, the part is repaired, or if necessary, replaced with a comparable and commercially available replacement part. This expense—no matter how much--qualifies for the routine maintenance safe harbor and is currently deductible by Howard. No muss, no fuss, just deduct the entire amount.

However, there are two big limitations on routine maintenance: the ten-year rule, and the no betterments rule.

Ten-year rule

Routine maintenance can be performed and deducted under the safe harbor any time during the property’s useful life, including after it has been fully depreciated. However, building maintenance qualifies for the routine maintenance safe harbor only if, when you placed the building or building system into service, you reasonably expected to perform such maintenance more than once every ten years.

In determining whether you can reasonably expect to have to perform the maintenance more than once every ten years, you are supposed to take into consideration factors such as the recurring nature of the activity, industry practice, manufacturers’ recommendations, and your own experience with similar or identical property.

The more than once every 10 year requirement would seem to eliminate use of the routine maintenance safe harbor for building components that typically don’t need such frequent maintenance—for example roofs, windows, and wooden or tile flooring. However, repairs to such components may be currently deductible under the regular IRS repair regulations. For example, the regular repair regulations provide that installation of a new waterproof membrane (top layer) on a building’s roof to eliminate leaks through original (worn) membrane is a deductible repair.

No betterments or restorations

The routine maintenance safe harbor is intended for expenses property owners incur to keep their property in ordinarily efficient operating condition. Moreover, the maintenance must be attributable to the taxpayer’s use of the property, not that of a previous owner. Thus, the safe harbor does not apply to scheduled maintenance performed shortly after purchasing a building.

This safe harbor is not supposed to be used to currently deduct major remodeling or restoration projects. It specifically does not apply to expenses for betterments or restorations of buildings or other business property in a state of disrepair.

Thus, for example, you can’t use the routine maintenance safe harbor to currently deduct the cost of a building remodel or replacing an entire roof.

Routine Maintenance Safe Harbor for Personal Property

The routine maintenance safe harbor can be used for maintenance for personal property—that is, property other than buildings and building components. In this event, the safe harbor applies only if, when you placed the property into service, you reasonably expected to have to perform the maintenance more than once during the property’s class life--that is, during the recovery period prescribed by the IRS under the MACRS alternative depreciation system (ADS). The ADS class lives for most types of property used by landlords are shown in the following chart:

Asset

ADS Class Life

Office furniture, fixtures, and equipment (includes furniture and fixtures that are not a structural component of a building--for example, refrigerators, stoves, countertops, carpets, kitchen cabinets)

10 years

Computers and peripherals

5 years

Automobiles

5 years

Construction equipment

6 years

Thus, for example, maintenance for a computer would come within the routine maintenance safe harbor only if the taxpayer reasonably expected to have to perform such maintenance at least twice during the first five years after the asset was placed into service.

Example: Landlord Bob purchases a sit-down lawnmower with a five-year class life. Unfortunately, the mower turns out to be a lemon. During the first five years he owns it, he has to have its engine replaced twice. This expense was not something he could have reasonably expected to incur when he bought the mower. Thus, the expense does not qualify as currently deductible under the routine maintenance safe harbor.

Adopting the Routine Maintenance Safe Harbor

The routine maintenance safe harbor is not elective—that is, it is not claimed each year by filing an optional election with your tax return. Rather, the routine maintenance safe harbor is a method of accounting you adopt. Moreover, after you do so, you must use it every year. You adopt the routine maintenance safe harbor by currently deducting expenses that come within it on your books and on your tax return. If you don’t want to use this safe harbor, don’t adopt it for 2014 or a future year. Its use is completely voluntary.

If you were in business prior to 2014, you have the option of applying the IRS repair regulations to years before 2014. To do so, you must file IRS Form 3115, Application for Change in Accounting Method, to obtain automatic permission from the IRS to change your method of accounting. Among the accounting changes you include in this form is the routine maintenance safe harbor. When you do this, you apply the safe harbor to expenses you incurred before 2014, and may be entitled to deduct amounts you previously depreciated. Unfortunately, IRS Form 3115 is an extraordinarily complex form that few taxpayers will be able to file without the help of a knowledgeable tax professional. Form 3115 is due by the due date for timely filing your tax return. For individuals, this means Forms 3115 for the 2014 tax year must be filed by October 15, 2015 (the due date of your return with an automatic six-month extension). If your business is owned by an LLC, partnership, or S corporation, you have until September 15, 2015 to file. As long as each distinct business you own has (1) assets under $10 million (as of the first day of the tax year) or (2) less than $10 million in annual gross receipts, you have the option of choosing not to apply the repair regulations retroactively to years before 2014. (IRS Revenue Procedure 2015-20.) In this event, there is no need to file IRS Form 3115 with your 2014 return. You may choose to adopt the routine maintenance safe harbor starting in 2014 without making any annual election or tax filing.

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