Q: What are the new rules in regard to building write-offs and repairs?

A: The IRS has been paying close attention lately to an allegedly abusive practice in which restaurant owners treat some costs for building purchases and improvements as repair expenses in their tax returns, effectively writing off these costs against current income.

With IRS scrutiny in mind, any restaurant building owner who has incurred building-related costs in 2014 needs to adopt the “units of property” accounting method in 2014, or he may be required to capitalize all repair and maintenance expenses. For example, let’s say you have brought in someone to repair your refrigeration lines many times over the past year. These expenses do not add up to much individually, but over the year they can be significant. If you do not use this “units of property” method of accounting, those expenses may have to be capitalized and written off through depreciation, thus not reducing current-year net income as you might have anticipated.

Many accountants suggest creating a cost segregation study for all building and improvement expenditures in 2014. This engineering-based building study would help you acquire the “units of property” details you’ll need. IRS regulations do not explicitly require such a study. But these studies allow you to offer solid reasons for the figures you use in your tax returns; otherwise, the IRS may disallow those expenses—and even pile on some penalties—if you get audited. The IRS is generally comfortable with cost segregation studies, since professional engineers often use them. Without such a study, how would you or your CPA calculate the costs of your building’s units of property, such as the electrical system and plumbing system or, say, the replacement of old windows with new energy-efficient windows? An independent study provides you with solid evidence to support your expense claims.

Whether you commission such a study or not, make sure you discuss any 2014 building repairs or improvements with your accountant before filing your 2014 tax return!