8A — September 13 - 26, 2019 — M id A tlantic
Real Estate Journal
www.marej.com
M id A tlantic R eal E state J ournal
t’s in every article, in ev- ery conversation, and on everybody’s mind – tax By Bruce A. Johnson, CRE, Capstan Tax Strategies Passing the BAR: Exploring Decision-Making Under the TPRs I capitalized. not be overlooked in the com- motion currently surrounding the TCJA.
avail yourself of the Routine Maintenance Safe Harbor, DeMinimus Safe Harbor, or Small Taxpayer Safe Harbor, you may be able to expense your asset completely. What if your expenditures don’t meet any of the above exceptions to capitalization? Then it’s off to STEP TWO, referred to as the BAR Test. The purpose of the BAR Test is to determine whether the cost represents an improvement in the form of a Betterment, Adaptation, or Restoration. If the expenditure is deter- mined to be an improvement,
it must be capitalized. This seems straightforward, but in fact there are many nu- ances. Let’s look more closely at what makes a “B,” an “A,” and an “R,” and discuss some pertinent examples of costs that may or may not “pass the BAR.” B is for Betterment The first type of betterment is one that corrects a pre- existing material condition or defect. If a taxpayer purchased land and then discovered the soil was tainted, costs to remediate the soil would be a betterment and must be
The other types of better- ment are improvements that, well, make a property better. Assets that will increase the physical space or capacity of a property, or will increase the efficiency, strength, pro- ductivity or quality of the property are all considered betterments. Expanding the seating area at your successful family res- taurant? That’s a material addition to increase size, and is therefore a betterment that must be capitalized. Sprayed insulation through- out your property, resulting in a tremendous decrease in energy costs? That’s a mate- rial increase to the property’s efficiency, and is therefore a betterment that must be capitalized. Replaced your worn-out roof membrane? Hold on, because this could go either way… Imagine you purchased the property with a functioning roof membrane in good operat- ing condition and over time, due to normal wear and tear, the membrane began to wear out. If you replace the old membrane with a new compa- rable membrane, returning it to its initial condition but not making it any better, this is not considered a betterment. According to the regulations, in this situation the newmem- brane could be expensed. However, imagine that you decide to replace the worn membrane with a more ener- gy-efficient one, resulting in increased efficiency. In this situation, the new membrane would be considered a better- ment, and would have to be capitalized and depreciated. A is for Adaptation An improvement is consid- ered an adaptation if it adapts the Unit of Property to a use other than the original use of the UoP at the time the build- ing was placed-in-service. The classic example of an adaptation highlighted in the regulations considers a taxpayer who opens a manu- facturing facility, which func- tions for several years manu- facturing some type of item. The taxpayer decides to take a portion of the manufactur- ing space and convert it into to sales showroom space. The costs required to modify the building would be considered adaptations, since they are continued on page 18A
The Tangible Property Reg- ulations (TPRs) remain very much in play, and in fact aug- ment the utility of the TCJA. When applied correctly, the TPR guidelines determine precisely which costs require capitalization, and which may be expensed, complimenting the tax savings opportunities available through the TCJA. The FIRST STEP to suc- cess when using the TPRs is checking out the three Safe Harbors elections – if you can
reform. The T a x C u t s a n d J o b s Act (TCJA) is a historic piece of leg- islation and it’s really no surprise that t h e TC J A
Bruce Johnson
has gotten lots of attention. However, it’s important to remember that other tax strat- egies are still alive and well, and these opportunities should
For more information Contact Lea Christman, 781-740-2900 lea@marejournal.com
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