The document provides guidance on analyzing repairs and maintenance costs under new IRS regulations regarding the treatment of building systems as separate units of property (UOPs). It outlines a decision tree for determining whether costs should be deducted as repairs or capitalized. Key points include: 1) HVAC, electrical, and other building systems are now separate UOPs from the overall building; 2) there are exceptions for small taxpayers and those following accounting policies; and 3) costs related to improvements or betterments must be capitalized while replacement of systems may be deductible repairs.

1. Performing A
“Repairs & Maintenance” Study:
2011 Temporary Regulations Decision Tree and Analysis

2. Unit of Property (UOP)
• The 2011 rules change the UOP rules for buildings.
Under the old rules, an entire building and its
structural components were considered 1 UOP.
Under the new rules, the following building components
are considered separate UOPs from the building:
a. HVAC,
b. plumbing,
c. electrical, escalators,
d. elevators,
e. fire protection and alarm,
f. security,
g. gas distribution,
h. and any other system identified in published guidance.
i. Review Area: if client has any of the above-described assets
for which a repairs deduction was taken in PYs, segregate
such assets to determine if repairs cost are capitalizable
when each asset considered a separate UOP.
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3. Aquired or Produced Building
Taxpayer can deduct the cost of the UOP less
System UOPs: than or equal to of 0.1% of the taxpayer’s gross
receipts or 2% of the taxpayer’s total
depreciation and amortization for the tax year?
Exceptions to the Rule…
Yes
Yes
Does the taxpayer
Yes maintain financial
statments? Did the taxpayer treat the cost as
an expense on its AFS?
Does the taxpayer have
written P&P allowing for
expensing up to certain No
Yes amount? No
No
Was the UOP acquired
or produced?
No Proceed to
”Betterment” Analysis
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4. …But If No Exception
If none of the exceptions apply, have you capitalized the
Applies… “transaction costs” paid or incurred in connection with
the acquisition of the UOP?
Is the UOP real property?
If yes, consider “pre-decisional”
Qualifying “Transaction Costs” Paid or Incurred in exception for investigatory costs
Connection with the Acquisition of the UOP (Temp. Reg. 1.263(a)-2T(f)(2)(iii).
1. Transportation costs, shipping fees
2. Appraisal Fees
3. Costs/fees associated with negotiating and structuring the terms of the acquisition,
4. Application fees, bidding costs, and smiliar expenses
5. Conveyance costs
6. Architecutal, eginerring, inspection, and environmental fees
7. Other “inherently faciliatative” costs (Temp. Reg. 1.263(a)-2T(f)(2)(ii)).
8. Employee and overhead costs NOT required to be capitalized (Temp. Reg. Sec. 1.263(a)-2T(f)(2)(iv).
Is the UOP real property? If yes, consider “pre-decisional” exception for investigatory costs (Temp. Reg. 1.263(a)-2T(f)(2)(iii).
9. Moving and Reinstallation costs:
If UOP has already been placed in service = deductible.
If costs of moving/reinstallation of UOP directly benefit, or are incurred by reason of, an improvement to the
moved/reinstalled UOP = capitalize
(Helpful Hint: If improvement cost is required to be capitazlied, moving/reinstallation cost follow that treatment).
Review Area: Routine Maintenance Safe Harbor. 2008 Regulations permitted this election to be made for buildings. The new rules do NOT permit this
safe harbor election for routine maintenance w/r/t buildings.
Consider costs that have been previously deducted, and now must be capitalized.
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5. …But If No Exception
Applies… Helpful Hint: If improvement cost is
required to be capitalzied,
moving/reinstallation costs receive the
same treatment
If none of the exceptions apply, have you capitalized the “transaction
costs” paid or incurred in connection with the acquisition of the UOP?
Transportation costs, shipping fees Moving and Reinstallation Costs
Appraisal Fees
Costs/fees associated with negotiating and structuring the terms of the acquisition,  If UOP has already been placed in
application fees, bidding costs, and smiliar expenses service = Deductible
Conveyance costs  If costs of moving/reinstallation of
Architecutal, eginerring, inspection, and environmental fees UOP directly benefit, or are incurred
Other “inherently faciliatative” costs (Temp. Reg. 1.263(a)-2T(f)(2)(ii)) by reason of, an imporvement to the
Employee and overhead costs NOT required to be capitalized (Temp. Reg. Sec. moved/reinstalled UOP = Capitalize
1.263(a)-2T(f)(2)(iv)
Review Area: Routine Maintenance Safe Harbor
Is the UOP real property?
If yes, consider “pre-decisional”  2008 Regulations permitted this election to be made for
exception for investigatory costs buildings.
 The new rules do NOT permit this safe harbor election for
(Temp. Reg. 1.263(a)-2T(f)(2)(iii).
routine maintenance w/r/t buildings.
 Consider costs that have been previously deducted, and now
must be capitalized.
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6. Did the Costs Paid or Incurred to Acquire or Produce the
Building System UOP Result in a “Betterment?”: NOTE: The taxpayer’s knowledge at the time
of acquisition or production of the UOP
regarding the material condition or defect is
Did it ameliorate a material condition or defect that existed prior to the taxpayer’s irrelevant to the analysis.
acquisition of the unit of property?
No
Did it result in a material addition (i.e., enlargement, expansion) to the unit of property?
Yes, if it results in a material increase in
capacity, productivity, efficiency, strength or quality of
the unit of property.
No
YES Consider “Facts or Circumstances”:
i. purpose of the expenditure;
ii. physical nature of the work performed;
iii. the effect of the expenditure on the unit of property; and
iv. the taxpayer’s treatment of the expenditure on its applicable
financial statements.
No
If F&C don’t indicate “betterment”, consider “routine maintenance safe harbor”
Proceed to (Temp. Reg. Sec. 1.263(a)-3T(g)). Activities constituting “routine maintenance”
activities include:
”Betterment” a. Inspection, cleaning, tesing of the UOP;
Analysis b. replacement of parts with comparable and commercially available and
reasonable replacement parts.
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7. “Restoration” Analysis
Threshold Question: Did the Costs Paid or Incurred to Acquire or
Produce the Building System UOP Result in a “Restoration”
Was a component of the UOP:
i. Replaced with a subsequent
loss deduction, or
ii. Was a gain/loss realized by
selling or exchanging the
replaced component
Costs Do Not Qualify
Yes
No Costs Must Be As A Capitalized
Restoration
Yes
Capitalized
Was a casualty loss resulting in
any basis adjustment claimed
on the repaired UOP? No
No Yes
Yes Yes
Did the expenditure return the UOP to its ordinary Did the expenditure Was the expenditure for the replacement of a
efficient operating condition after the property has rebuild the UOP to a part or a combination of parts that comprise a
No like-new condition after
No major component or a substantial structural part
deteriorated to a state of disrepair and is no longer
functional for its intended use? the end of its class life? of the UOP?
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