As a building owner it’s important to know whether or not you can use the cost of the roof (from a new commercial roof installation or roof repair) as a tax deduction. A variety of factors play a part.
How much you can write off depends on when you purchased your roof, as well as how much it improved the commercial building’s thermal efficiency. Let’s dig a little deeper and find out what you need to know in order to determine if your commercial roof depreciation can be a tax benefit (and how you can use government programs to cut your total installation cost).
Table of Contents
- Understanding Depreciation: Get the Most Out of Your Commercial Roof!
- Defining Commercial Roof Depreciation
- Is Commercial Roofing a Capital Expenditure or an Expense?
- How is the IRS Section 179 Deduction Calculated and Applied?
- Other Business Deductions to Check Out
- Combining Depreciation with Energy Efficiency Tax Credits
- Get the Most Out of Your Commercial Roof
Defining Commercial Roof Depreciation
Depreciation is the term for allocating the cost of a long-term asset over its useful life. Commercial roof depreciation is the estimated time that a commercial property’s roof is expected to provide economic benefits to business owners.
There are different factors that go into determining the depreciation life (or recovery period) of a commercial roof – quality, climate, maintenance and repair history from roofing contractors all come into play. Typically, a commercial roof’s useful life is between 10 to 50 years – a wide range that depends on the type of roofing system that was installed. But, that’s the actual lifespan of the roof…not the IRS timetable for depreciation.
Is Commercial Roofing a Capital Expenditure or an Expense?
It’s important to understand the difference between a business expense and a capital improvement. Expenses are things that maintain current operations, like office supplies or repairs, while capital improvements increase the value of your assets (in this case, your building).
An expense is recorded immediately and reduces the company’s net profit. A capital expenditure, or a capital improvement, is recorded as an asset and depreciated over time.
Materials are expenses, just like repairs are to equipment. They reduce net income, which reduces taxable income for that year. However, let’s take this a step further, because commercial roof replacement and repair can be capitalized if it meets one of three conditions:
- You install a new roofing system that is better than the previous roof when it was new
- The current roof is restored to like-new condition
- The building is retooled for a different use
Any other repairs or replacements are expenses.
If the roof was recently damaged and needs repaired or you replace a worn-out roof with a new one that offers the same performance, it’s a capital expenditure. Here are some examples:
- Replacing a worn-out roof with a new roof that is better insulated or better at reflecting heat (Since you’re almost guaranteed to be using better materials than those available when your first roof was installed, most new or restored roofing qualifies.)
- Converting an office space into a restaurant (The roof is rebuilt to accommodate vents for cooking equipment.)
- Replacing the roof on a building you purchased within the first year to two years (This repair is close enough to the purchase that it’s seen as an improvement rather than normal roof maintenance.)
How are IRS Capital Deductions Calculated and Applied?
Section 179 of the IRS Tax Code covers depreciation for business property, including roofing. The IRS releases a guide for each tax year on this subject called Publication 196.
In the past, the IRS had businesses spread out depreciation over 39 years for nonresidential real property, no matter how long the roof lasted. However, they added new tax law programs with bonus depreciation, allowing faster claims on income taxes.
Current rules for bonus deprecation come from the Tax Cuts and Jobs Act, which came into effect in 2018. Business taxpayers could receive a one-time deduction for a new roof/capital expense (up to $1,050,000) in the same year the asset was put “into service.”
In previous years, businesses could utilize bonus depreciation for 100% of capital expense costs in the first year. For 2023, however, only 80% of a Section 179 deduction can be claimed in year one. In 2024, maximum claims drop to 60%, then 40% in 2025 and 20% in 2026
What does this mean for your business? Have no fear. You will still be able to write-off costs; the difference is that it all can’t be claimed in the first year. The remaining amounts must be claimed over the asset’s useful life.
Other Deductions to Check Out
Not only can you look into claiming your commercial roof’s depreciation, but alarm systems that include security systems and fire protection systems can be considered, too.
Combining Depreciation with Energy Efficiency Tax Credits
Depreciation isn’t the only way to reduce your tax bill. Energy efficient roofing upgrades also earn additional tax credits. An energy efficient roof is better than an old one, which means using green building techniques qualifies your construction as a capital expenditure.
The Energy-Efficient Commercial Buildings Tax Deduction covers buildings constructed before 2018. Under this deduction, multiple improvements can be bundled together to meet energy reduction requirements. This includes heating, cooling, lighting, ventilation and hot water systems.
A 50% improvement can earn a tax credit up to $1.88 per square foot. Smaller improvements can earn a partial credit up to $0.63 per square foot. To earn this credit, this energy reduction must be proven with computer modeling using approved software. Non-profit organizations cannot take advantage of this credit, unless they contract with an Energy as a Service (EaaS) provider.
Get the Most Out of Your Commercial Roof
We encourage you to talk with a tax professional to find out more about commercial roof depreciation and how utilizing this unique depreciation schedule can benefit your business. Then, when you’re ready for a new roof or high quality roof repairs, reach out to TEMA!
TEMA Roofing Services is proud to be the first choice when it comes to commercial roof and HVAC installation, maintenance and repair. Looking for a way to manage long term risk? We also offer roof asset management, which helps to prevent problems and provide immediate repair when you do have an issue. Contact us today to learn more about our services.