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If we go back to the Supreme Court guideline, the answer to the question lies in whether such costs increase the value of the property or extend the useful life. In 1967, the Tax Court addressed this issue in the Oberman Manufacturing Co. In that case, Oberman had taken a $20,791 expenditure as a current expense on their roof in Fayetteville, Arkansas.
The IRS had taken the position that the cost should be capitalized. In ruling in favor of Oberman, the court found that the company’s only purpose in having the work done to the roof was to prevent the leakage. The court further emphasized that there was no replacement or substitution of the roof and that this was the economical way to repair the leaks and keep the property in an efficient operating condition. As to whether the expenditure increased the value of the property, the court acknowledged that the property is more valuable once the roof is repaired but the proper test is to whether the expenditure materially enhanced the value, use, life, expectancy, strength or capacity as compared with the status of the asset prior to the condition necessitating the expenditures.
Where the owner selects a preventative maintenance process for his roof, it would be proper for him to treat such expenditure as a current expense. His sole purpose is to stop the leakage and return the building to a watertight condition. The life value of the building has not been materially enhanced. New insulation and roofing did not replace or substitute the old roof. Treating preventative roof maintenance as a current expense is an aggressive tax position that might well be questioned by the IRS in the event of an audit. Nonetheless, the position is legally strong and ought to prevail.
The building owner's attitude will change drastically when aware of preventive maintenance's tax advantages. Rather than bemoaning the fact he is confronted with a large and unexpected expenditure, they will see that their roof work will serve not only as a rain shelter but as a tax shelter as well.