Contractors who do commercial roofing have a powerful new incentive for small business owners in the form of a new expensing rule that should encourage complete reroofs rather than patches and repairs.
The Tax Cuts and Jobs Act that was signed into law late last year allows full expensing of nonresidential roof improvements under Section 179 of the tax code. Under that provision, qualifying business owners can now write off roofing costs in the same year of the purchase. Previously for roofs, those costs had to be recovered over a 39-year depreciation cycle. The new provision sets the amount businesses may expense at $1 million and increases the phase-out threshold to $2.5 million.
While the new, more favorable expensing rule is a clear win, it is also a limited one. “It’s basically designed for small businesses,” said Duane Musser, vice president of government relations for NRCA.
The new expensing rule also does not apply to rental property such as condos or apartments. Those structures are currently under a 27.5-year depreciation cycle. And while it’s possible Congress could expand the new expensing rule to those properties, it’s unlikely,
“We’re very pleased to see it in the final tax bill,” Musser said. “But it’s only a partial solution.”
For about the last 15 years, NRCA has lobbied Congress to reform the depreciation schedule for all nonresidential roofs, which is currently 39 years to 17 years. Although the new expensing rule only covers small business owners, it’s still a boon for roofers, Musser said.
“It’s certainly going to help accelerate economic activity over the coming years,” he said. “It’s a good deal for roofers.”
An older NRCA study that looked at the economic impact of reducing the depreciation cycle from 39 years to 17 years showed the change producing 40,000 new jobs and a $1 billion in economic activity, Musser said.
Because the new expensing rules only apply mainly to small businesses, it’s difficult to predict their full economic impact, Musser said. He added that ongoing workforce shortages might also stifle the potential business boost. As of 2018, there were about 30 million small businesses nationwide, according to the Small Business Administration.
So even though the new expensing rule is limited, it will still have a major economic impact, Musser predicted. That’s because under the previous expensing rules, all businesses were “disincetivized” to do complete reroofs due to the long depreciation cycle.
Instead, they often did small repairs and patches even when more major work was needed, Musser said. Now small businesses will more be more likely to pull the trigger on long-needed reroofing projects since they have the ability to expense the entire cost in the same year the work is done, he added.
“It might make you do it sooner than you otherwise would,” he said.
Contractors who do commercial roofing can capitalize on the new expensing rules by sending out letters to customers letting them know about the expensing change. NRCA has pre-written letters available for that purpose, Musser said. He also encouraged roofers to spread the word through their social media and websites.
Finally, he recommended that all roofers talk with their tax professional about the new expense rules and how best to apply them.
