The rules for Building Systems, the fourth topic in our series, clarify that a building has nine different units of property when determining if an expenditure is a capitalized improvement or a deductible expense.
The unit or property concept is the foundation for capitalization analysis. The general rule is that all functionally interdependent components are a single unit of property. Prior to these rules, only the building in its entirety was considered a unit of property. Under these new rules, to determine if a building expenditure meets the improvement standard to be capitalized and depreciated over its useful life rather than a deductible expense, each of these following nine building systems are considered a unit of property:
- Heating, ventilation and air conditioning (HVAC) systems
- Plumbing systems (pipes, drains, sinks, toilets, etc.)
- Electrical systems (wiring, outlets, lighting fixtures, etc.)
- All escalators
- All elevators
- Fire protection and alarm systems (sensing devices, computer controls, sprinkler heads, etc.)
- Security systems (window and door locks, security cameras, recorder, monitors, motion detectors, etc.)
- Gas distribution systems
- Other structural components (roof, walls, floors, etc.)
What this means to you: Through the Building Systems rules, building expenditures are analyzed as a part of one of the nine building systems, rather than the entire building, to determine if a capitalized improvement or a deductible expense exists.