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New depreciation schedule for commercial roofs, March 2004


Proposal

NRCA proposes that Congress should amend section 168 of the Internal Revenue Code to provide a shorter, more realistic recovery period for the depreciation of commercial roofs.

Background

The bipartisan Realistic Roofing Tax Treatment Act of 2003 (H.R. 3310) was introduced by Rep. Mark Foley (R-Fla.) on Oct. 16, 2003, and would reduce the depreciation recovery period for commercial roof systems from the present 39-year schedule to a more realistic 20-year period. On Sept. 30, Sen. Jim Bunning (R-Ky.) introduced companion legislation (S. 1679) in the U.S. Senate.

The current depreciation period for roofs is 39 years, as it is for all section 1250 real property. Prior to the 1980s, separate building components could be depreciated at different rates, but in 1981, Congress eliminated component depreciation and put in place a general depreciation period of 15 years for all building components. In 1993, the recovery period for nonresidential property was extended to 39 years in order to raise additional revenue. Because of the current 39-year depreciation period, business owners often delay, or forego altogether, roofing expenses for their businesses because they tend to be costly, and the current depreciation schedule discourages the assumption of such an expense. It is a disincentive for building owners to replace non-performing roofs because replacing failing roofs before 39 years have elapsed means carrying on the books the burden of roofs that no longer exist.

The current 39-year depreciation period is not a realistic measure of the average life span of a commercial roof. A recent study by Ducker Worldwide, a leading industrial research firm, determined that the current aggregate commercial roof life span is approximately 17 years, less than half of the depreciation period. The inability to recognize a loss on the replaced component places taxpayers in the position of having to continue depreciating replaced or abandoned components because tax depreciation is slow relative to economic depreciation.

Policy benefits

Adoption of a new class life would satisfy three important policy goals: enhanced energy efficiency (data indicates that 90 percent of building owners choose more energy-efficient systems when they replace their roofs); tax relief for America's manufacturing sector; and a growth impetus for the construction industry. With a new depreciation schedule for roofs, business owners would no longer put off needed roof work, opting instead to purchase newer, more efficient systems. And if the number of years over which one depreciates property and the number of years over which a property deteriorates are commensurate, the business owner would have strong incentive not to risk structural damage to save a few dollars.

Because a 39-year depreciation schedule for commercial roofs makes little economic or environmental sense, NRCA proposes allowing building owners to depreciate commercial roofs over a 20-year period. The change would address the issue of the appropriate recovery period and allow for the recognition of legitimate losses. NRCA urges Congress to pass H.R. 3310 and S. 1679.

(March 2004)





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