definition within the “repair regulations” with its own
subset of rules) or not will impact the tax treatment, the
company may be able to expense it as it is replaced.
Therefore, the company could be in a position to currently deduct the cost of the muffle and realize a tax
benefit in the year of the purchase instead of capitalizing
it and seeing smaller deductions over several years. The
distributor of the muffle can add value by alerting the
customer to these potential tax savings.
Similarly, if a distributor is working with HVAC units,
roofing materials, windows, or other parts of a building, it has an opportunity to educate customers on their
ability to expense costs that they may have previously
Under the new regulations, a building is broken down
into various systems, such as the HVAC system, plumbing
system, and electrical system. The regulations require taxpayers to evaluate any expenditure they make in relation
to the impact on these building systems. As a result, the
cost of these expenditures does not necessarily determine whether a taxpayer capitalizes the spending as an
improvement or treats it as an expense.
The IRS offers an example in the regulations of an office building with 300 windows, which comprise a quarter
of the building’s surface area. If the company replaces
100 of the windows, it may qualify as a repair under the
rules, and the company could deduct the cost. However,
replacing 200 of the windows would likely qualify as an
improvement that must be capitalized.
Further, since the roof is considered part of a whole
building in the rules, replacing the roof’s membrane could
be considered a repair which a company can expense. In
the past, this would have been a cost it often capitalized
as an improvement.
It’s important to note that this part of the regulations,
which deals with whether to capitalize or expense an
item, does not require conformity between a company’s
tax statements and financial statements. Thus, a company could deduct the cost of replacing windows for tax
purposes but capitalize the cost for financial statement
An Opportunity For Distributors
Distributors are still engaged in the tedious process of
understanding how the IRS’ “repair regulations” impact
their businesses. Still, the “repair regulations” are a
reality distributors have to face. And the distributors that
put in the extra work and time needed to fully educate
their teams will put themselves in a position to enjoy
added tax benefits as well as a competitive edge with
James Wagner, CPA, is partner-in-charge of the manufacturing and distribution practice at Sikich LLP. James
Brandenburg, CPA, is a tax partner at Sikich LLP. Sikich LLP
is a professional services firm specializing in accounting,
technology, investment banking and advisory services.