Performing A

“Repairs & Maintenance” Study:

2011 Temporary Regulations Decision Tree and Analysis

11

Unit of Property (UOP)• The 2011 rules change the UOP rules for buildings.

Under the old rules, an entire building and itsstructural components were considered 1 UOP.Under the new rules, the following building componentsare 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 capitalizablewhen each asset considered a separate UOP.

2

Was the UOP acquired or produced?

Yes

Does the taxpayer have written P&P allowing for expensing up to certain

amount?

No

Does the taxpayer maintain financial

statments? Did the taxpayer treat the cost asan expense on its AFS?

Taxpayer can deduct the cost of the UOP lessthan or equal to of 0.1% of the taxpayer’s grossreceipts or 2% of the taxpayer’s totaldepreciation and amortization for the tax year?

Proceed to ”Betterment” Analysis

Yes

Yes

No

No

Yes

Aquired or Produced Building System UOPs:

No

Exceptions to the Rule…

3

If none of the exceptions apply, have you capitalized the“transaction costs” paid or incurred in connection withthe acquisition of the UOP?

1. Transportation costs, shipping fees2. Appraisal Fees3. Costs/fees associated with negotiating and structuring the terms of the acquisition,4. Application fees, bidding costs, and smiliar expenses5. Conveyance costs6. Architecutal, eginerring, inspection, and environmental fees7. 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.

…But If No Exception Applies…

Qualifying “Transaction Costs” Paid or Incurred inConnection with the Acquisition of the UOP

Is the UOP real property?If yes, consider “pre-decisional”exception for investigatory costs(Temp. Reg. 1.263(a)-2T(f)(2)(iii).

4

If none of the exceptions apply, have you capitalized the “transactioncosts” paid or incurred in connection with the acquisition of the UOP?

Review Area: Routine Maintenance Safe Harbor

2008 Regulations permitted this election to be made forbuildings.

The new rules do NOT permit this safe harbor election forroutine maintenance w/r/t buildings.

Consider costs that have been previously deducted, and nowmust be capitalized.

…But If No Exception Applies…

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 imporvement to the

moved/reinstalled UOP = Capitalize

Transportation costs, shipping feesAppraisal FeesCosts/fees associated with negotiating and structuring the terms of the acquisition,

application fees, bidding costs, and smiliar expensesConveyance costsArchitecutal, eginerring, inspection, and environmental feesOther “inherently faciliatative” costs (Temp. Reg. 1.263(a)-2T(f)(2)(ii))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).

Helpful Hint: If improvement cost isrequired to be capitalzied,moving/reinstallation costs receive thesame treatment

5

YES

No

Did the Costs Paid or Incurred to Acquire or Produce the

Building System UOP Result in a “Betterment?”:

Did it ameliorate a material condition or defect that existed prior to the taxpayer’sacquisition of the unit of property?

Did it result in a material addition (i.e., enlargement, expansion) to the unit of property?

NOTE: The taxpayer’s knowledge at the time

of acquisition or production of the UOP regarding the material condition or defect is

irrelevant to the analysis.

Yes, if it results in a material increase incapacity, productivity, efficiency, strength or quality of

the unit of property.

If F&C don’t indicate “betterment”, consider “routine maintenance safe harbor”(Temp. Reg. Sec. 1.263(a)-3T(g)). Activities constituting “routine maintenance”activities include:a. Inspection, cleaning, tesing of the UOP;b. replacement of parts with comparable and commercially available and

reasonable replacement parts.

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; andiv. the taxpayer’s treatment of the expenditure on its applicable

financial statements.

No

No

Proceed to ”Betterment”

Analysis

6

No

Yes

Yes

Yes

Yes

Yes

NoNo

No

No

“Restoration” Analysis

Was a component of the UOP:i. Replaced with a subsequent

loss deduction, orii. Was a gain/loss realized by

selling or exchanging thereplaced component

Threshold Question: Did the Costs Paid or Incurred to Acquire orProduce the Building System UOP Result in a “Restoration”

Was a casualty loss resulting in

any basis adjustment claimed

on the repaired UOP?

Did the expenditure return the UOP to its ordinary

efficient operating condition after the property has

deteriorated to a state of disrepair and is no longer

functional for its intended use?

Did the expenditure

rebuild the UOP to a

like-new condition after

the end of its class life?

Was the expenditure for the replacement of a

part or a combination of parts that comprise a

major component or a substantial structural part

of the UOP?

Costs Must Be Capitalized

Costs Do Not Qualify As A Capitalized

Restoration