Moore
January 2018 Newsletter

Cost of replacing parking lot roof deductible

A current expense is normally an expense that does not create significant value that endures into taxation years beyond the year of expenditure and is deductible in full in the year of expenditure.

Conversely, a capital expense is normally an expense that does create significant value that endures into later taxation years and are depreciable over time.

In the recent case of Aon Inc., a corporation was allowed to fully deduct the cost of replacing a roof of a parking lot. The parking lot was mainly underground, below Aon’s commercial buildings. However, some of the lot was outside, and that portion was covered by a roof made largely of concrete. Over the years, the roof deteriorated, due to weather conditions and in particular ice and salt. The taxpayer made recurring repairs over several years, but eventually the entire roof had to be replaced at a cost of over $4 million.

The issue in the case was whether the cost of replacing the roof was current or capital. As noted, the Tax Court held that the cost was a fully deductible current expense. In reaching this conclusion, the Court found that the purpose of the replacement was to make the garage function in the same way that it did previously, so that there was no increase in the garage’s functionality or profitability, and the new roof did not substantially increase the value of the Aon’s buildings compared to the value that would be seen with a garage in a good state of repairs. The Court concluded that this was not “a situation where the work has created something new… before the work there was a reinforced concrete roof; after the work there was a better built concrete roof”. Therefore, the cost was a current expense and was fully deductible in the year it was incurred.

Last modified on January 12, 2018 12:00 am