By A. Chris Ostler, CPA
Tangible Property Regulations compliance services are best rendered by an engagement team made up of skilled tax professionals to interpret the latest tax laws and engineers to truly comprehend the building envelope including all its components and systems. The purpose of the “BAR” test is to determine whether the costs incurred for repair and maintenance expenditures should be expensed or capitalized. The “BAR” test encompasses three critical components for analysis: Betterment, Adaptation, and Restoration. At Veritax Advisors, we have engagement teams comprised of leading tax professionals and engineers that work seamlessly together to ensure we optimize sustainable deductions while reducing compliance risk through systematic qualitative and analytical quantitative phases ranging from feasibility to assessment to implementation and execution.
Raise the “BAR”
The “B” is for Betterment and the most common types of betterment are simply improvements that make a property better. Assets that will increase the physical space or capacity of a property, or will increase the efficiency, strength, productivity or quality of the property are all considered betterments and must be capitalized. For example, strengthening a rooftop to add additional bearing weight for additional HVAC units and solar panels to be placed on the rooftop betters the roof and these costs must be capitalized.
The “A” is for Adaptation and improvements are considered an adaptation if it adapts the “Unit of Property” (“UoP”) to a use other than the original use of the UoP at the time the building was placed in service. The classic example of an adaptation highlighted in the treasury regulations considers a taxpayer who opens a manufacturing facility, which functions for several years manufacturing goods. The taxpayer decides to take a portion of the manufacturing space and convert it into to sales showroom space. The costs required to modify the building would be considered adaptations, since they are adapting a portion of the property to a different use – a showroom – and must be capitalized.
The “R” is for Restoration and costs are deemed a restoration if it is paid for the:
Costs incurred when returning a property component to its ordinary operating condition would also be considered restorations and would consequently require capitalization. It’s important to note that this doesn’t refer to normal maintenance performed to manage normal wear and tear such as repairing rooftops so that they can be maintained over their useful class lives. In contrast, if a rooftop is restored to “like-new” condition, then these costs would need to be capitalized.
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