Scenario: Older commercial building with an old roof that collapses due to heavy rainstorm.  The insurance reimbursement pays for the new roof.

Question: Is the roof replacement cost depreciable? 

Thanks for any help on this.

Jack Hauck/Red Point Development

GAAP vs. Tax accounting.

The accounting for financial statements is different than the accounting for tax purposes.

 For financial statements, the insurance proceeds net of the book value of the roof would be considered a gain for financials and the cost of the roof would be a new asset that gets depreciated.

For tax purposes, it would be considered a casulty loss and you have three years to reinvest the proceeds.  As long as you reinvest the proceeds, the gain is deferred for tax purposes.

Thomas, but would the book value change due to the new roof?

Thanks for your help on this...

Thank you all for your replies...

I can see both sides - I agree with Rod that "where is the cost?" if insurance reimburses the whole cost of the new roof (except for the deductible which will be expensed in the current year).

But the replacement of an entire roof definitely falls into the realm of an improvement that should be capitalized.  Becky makes the point that the roof would be capitalized while the reimbursement would be considered a gain. 

So we have two arguments - one for and one against capitalization.  And I'm still not sure which way to go.  Any other thoughts?

If the policy for the property in question was written on an Actual Cash Value (ACV) versus Replacement Cost policy than there could be issues with depreciation in addition to the cost of the deductible.  The best way to write this would be on a replacement cost policy with an agreed upon limit that adequately covers the overall value of the property.  In laymen's terms it all depends on how the policy was written at the inception of the policy. I hope this helps.

-Rob

You have 2 transactions to address/account for:

1) The reciept of the insurance proceeds and

2) The payment for the new roof.

It is in 2) that you will decide whether this is a Maintenance and Repair Expense or a Capital Item. If it is a Capital Item, you will depreciate it.

You said the roof is collapsed so I'm going to assume you have building with no roof on it.

A capital expense does the following:

-Substantially prolongs the life of the asset (in this case the bldg)

-Materially increases the value of the property

-Adapts the property to a new or different use

-Puts the property into a useful condition.

 A maintenance expense is the following:

-routine mainenance

-incidental repairs

-equipment and material that "keep" the property in an ordinary efficient operating condition.

I think you clearly have a capital item due to a roof increasing the value of the building vs. having no roof or a collapsed roof. I don't think anyone will buy or rent a commerical building with no roof. And the new roof clearly "puts the building into a useful condition" .  It is certainly not useful with no roof.

 I am just guessing at 1) and assuming b/c it is an "old" building that is is fully depreciated on the books and therefore any proceeds would be more than it's book value and you therefore have a "gain from insurance proceeds" .   

If you are replacing a few shingles, you have a maintence expense.

If the insurance proceeds payed for the new roof, what "cost" would there be? (other than maybe a deductible which would probably be expensable in the current period)

The insurance reimbursement paid for the new roof, the building owner isn't out any cost of replacement, I don't see any cost available to depreciate.