Repair Regulations: Improvement Tests at a Glance
The changes can probably be best summarized as follows (the “BAR” tests): A taxpayer must generally capitalize an
amount that improves a unit of property (“UOP”) if the amount results in a betterment, adapts the UOP to a new or
different use, or restores the UOP. While there are various examples in the regulations that indicate if the
expenditure is an improvement, and therefore capitalizable, the expenditure must be measured against each test. In
other words, if it is not a betterment, it still may be an improvement under the restoration or adaption tests.
However, if you fail the “BAR” tests the expenditure may qualify as a deductible repair.
Any determination on whether an expenditure is an improvement (and therefore capitalizable) is determined by the
proper UOP measurement. However there is a special rule with regard to buildings. An expenditure is an
improvement to the entire building if the expenditure constitutes an improvement to any building structure or system
(HVAC, plumbing system, electrical system, all escalators, all elevators, fire protection system, security system, gas
distribution system, or other systems in IRS published guidance). For example, an expenditure related to an existing
security system that results in an improvement to the security system is capitalized to the building and amortized
over 27.5 years or 39 years as appropriate.
Also, a federal, state, or local regulator's requirement that a taxpayer perform certain repairs or maintenance on a
unit of property to continue operating the property is not relevant in determining whether the amount paid improves
the unit of property.
Betterments
An expenditure must be capitalized if it ameliorates a material condition or defect that either existed prior to placing
the UOP into service, whether or not the taxpayer was aware of the condition or defect. An expenditure must also
be capitalized if it results in a material addition (including a physical enlargement, expansion, or extension) to the
unit of property or results in a material increase in capacity (including additional cubic or square space),
productivity, efficiency, strength, or quality of the UOP or the output of the UOP. If the expenditure adds additional
economic life to the UOP it probably has to be capitalized.
To determine whether an expenditure results in a betterment, it is appropriate to consider all the facts and
circumstances including, but not limited to, the purpose of the expenditure, the physical nature of the work
performed, the effect of the expenditure on the unit of property, and the taxpayer’s treatment of the expenditure on
its applicable financial statement. It is important to note that the replacement of a part with an improved, but
comparable part does not, by itself, result in a betterment to the UOP.
In cases in which a particular event necessitates an expenditure, the determination of whether an expenditure results
in a betterment of the UOP is made by comparing the condition of the property immediately after the expenditure
with the condition of the property immediately prior to the circumstances necessitating the expenditure. For
example you have an automobile that gets into an accident and needs repairs. The measurement is the automobile
prior to the accident and the automobile condition after the accident.
If the expenditure is made to correct the effects of normal wear and tear to the UOP, the condition of the UOP after
the last time the taxpayer corrected the effects of the normal wear and tear or, if the taxpayer has not previously
corrected the effects of normal wear and tear, the condition of the property when placed in service. It is important to
note that the taxpayer cannot correct a prior owner’s wear and tear without the expenditure constituting an
improvement.
Adaptation to a New or Different Use
In general, an amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent
with the taxpayer's intended ordinary use of the unit of property at the time originally placed in service by the
taxpayer. Examples of new or different use in the regulations include converting a manufacturing facility into a
showroom and amounts paid to prepare commercial property for use or sale as residential property. The regulations
also indicate that a change in the number of distinct retail spaces does not by itself result in a new or different use.
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Restoration of the UOP
A taxpayer must capitalize an expenditure to restore a UOP if the expenditure:
 Rebuilds to a like-new condition after the end of the class life;
 Replacement of a part or a combination of parts that comprise a major component or a substantial structural
part of the UOP;
 Return from a state of nonfunctional disrepair;
 Replacement of a component of the unit and the taxpayer has properly deducted a loss on disposition for
that component;
 Replacement of a component after a casualty loss; or
 Replacement of a component that was sold or exchanged.
To determine whether an amount is for the replacement of a part or a combination of parts that comprise a major
component or a substantial structural part of the unit of property, it is appropriate to consider all the facts and
circumstances. These facts and circumstances include the quantitative or qualitative significance of the part or
combination of parts in relation to the unit of property. A major component or substantial structural part includes a
part or combination of parts that comprise a large portion of the physical structure of the unit of property or that
perform a discrete and critical function in the operation of the unit of property. However, the replacement of a minor
component of the unit of property, even though such component may affect the function of the unit of property, will
not generally, by itself, constitute a major component or substantial structural part.
The examples in the regulations seem to indicate a 20% threshold (Not a Substantial Structural Part of the UOP) can
be applied and the following measurements were treated as repairs:
 2 of 10 HVAC units
 3 of 20 sinks
 30 of 300 Windows
However, the regulations treated the following examples as meeting the definition of a “Substantial Structural Part
of the UOP” and capitalization was required:
 200 of 300 Windows
 8 of 20 hotel room floors for bathroom refreshes
The term “structural components” includes such parts of a building as walls, partitions, floors, and ceilings, as well
as any permanent coverings such as paneling or tiling; windows and doors.
For More Information
Christian Wood | 612.253.6730 | cwood@eidebailly.com
Rod Axtell | 612.253.6543 | raxtell@eidebailly.com
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