Termite Damage Repair Deductions: What to do as a building owner

An office building is owned by Ima Attorney personally. The corporation leases building and pays for all related expenses.  The building is damaged by termites and cost incurred incident to the termite damage is $38,000.

Expenditures made during the year must be properly classified between capital expenditures and deductible expenses.  Should cost incurred to repair the termite damage be capitalized or expensed?

In reviewing the cases in this area, we found:

Midland Empire Packing Co., 14 TC 635 which found that the expenses incurred to prevent dam on taxpayer’s farm from leaking related to continue the use of the plant in normal condition.  It was essentially a repair and as such is deductible as an ordinary and necessary business expenses.

Evans v. Comm., cite as 40 AFTR 2d 77-5602 which found that the expenses deduction allowed for the costs incurred to stop dam on farm from leaking.  Work only restored dam’s capability of retaining water and did not materially add the dam’s value or ordinary life.

Vanalco Inc. v. Commissioner, TC Memo 1999-265 which found that the expenses incurred to replace part of plant roof was ordinary and necessary for keeping roof in operating condition.  It was not part of general rehabilitation plan and did not functionally improve, increase or prolong life of roof.

With respect to an expenditure that produces benefits both in the current tax year and in future tax years, the determination of whether the expenditures must be capitalized requires a careful examination of all the facts.

Accordingly, the amounts paid or incurred for incidental business repairs are currently deductible even though the repairs may serve some future benefit.

The expenditures for incidental repairs that keep property in an ordinarily efficient operating condition are deductible expenses, provided that:

(1) the repairs neither materially add to the value of the property nor appreciably prolong its life; 

(2) the cost of acquisition or production, or the gain or loss basis of the taxpayer’s plant, equipment or other property, isn’t increased by the amount of those expenditures;

(3) the repairs don’t adapt the property to a new or different use.

Based upon our findings, the repair cost of $38,000 incident to termite damage is deductible as an ordinary and necessary business expense to keep the property in efficient operating condition.

For more information about repairs, renovation and retrofitting deductions and tax strategies contact Ron Stumpf at 714.569.1000.

l.conderman

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