The new Tangible Asset Regulations (TARS) implements three new tests to determine whether expenditures related to a unit of property (UOP) should be capitalized or expensed. The three tests are the betterment test, the restoration test, and the adaptation test. If the expenditure meets any of the tests, the cost should be capitalized as an improvement to the UOP. All three tests must be done in succession before determining that expensing the cost is appropriate.
A betterment is an expenditure that does the following:
- Corrects a material condition or defect that existed prior to acquisition or arose during production of the UOP
- Results in a material addition to the UOP
- Results in a material increase in strength, capacity, productivity, efficiency, quality or output of the UOP
A restoration is an expenditure that does the following:
- Replaces a component of a UOP
- Repairs damage to a UOP
- Returns UOP to its ordinarily efficient operating condition if it deteriorated to a state of disrepair and is no longer functional for its intended use
- Rebuilds UOP to a like-new condition after the end of its ADS class life
- Replace major component or substantial structural part of UOP
An adaptation is an expenditure that adapts a UOP to a new or different use that is not consistent with the taxpayers intended ordinary use of the UOP when originally placed in service by the taxpayer.
What this means to you: By applying each of these tests, you will determine if you can accelerate your deductions by expensing the items in the current year, or if you will be required to depreciate the items over the useful life.