New IRS regulations governing repairs and capitalization

Posted by Jeffrey Feingold on 10.29.13

We at Tax Point Advisors would like to update you on new IRS regulations that will affect almost every business in the country. The government has released the much anticipated final regulations governing repairs and capitalization. This set of rules is meant to reduce controversies by better defining the difference between capitalizing and deducting tangible property expenses. This new regulation will take effect Jan. 1, 2014, replacing the temporary one of 2011. Overall, this regulation is more taxpayer friendly; however, there are significant changes in this 200 page document that will impact most businesses. It will be more than challenging to digest all of them and be in compliance by the Jan. 1 deadline. In order to alert you to these changes, we've listed some of the key points below:

  • This regulation governs when a business can capitalize and when they must deduct expenses for acquiring, maintaining, repairing, and replacing tangible property. This means a difference of a full tax deduction now or spread out over 5, 10, 15, or 20 years.
  • New procedures need to be in place by Jan. 1. The taxpayer has the option of using the new accounting procedures retroactive to 2012. The IRS has promised "Critical guidance" for later this year in how best to make these changes. Some businesses will need to file amended returns for 2012 and 2013 to capitalize on these benefits.
  • The IRS changed the value from $100 to $200 on materials and supplies that may be expensed.
  • The routine maintenance safe harbor is expanded to include expensing maintenance on buildings and their components that is expected to be done at least twice in a ten year period.
  • The aggregate ceiling of the de minimis rule in the temporary rules has been replaced with a $500 per-item or $5000 per-invoice limit. Written policies must be in place by Jan. 1 to use this. This change can be applied to 2012 and 2013 tax years.
  • Capitalization is still required on improvements to a unit of property. A unit of property is defined as functionally interdependent components such as a machine or a building. Building systems like heating, plumbing, or electrical can all be treated as separate units of property for purposes of capitalization.
  • Small businesses gain a break by not being required to capitalize improvements if the annual total for repairs and improvements on their building of under $1 million is under $10,000 or 2% of the unadjusted basis of the building. This safe harbor applies separately to each building owned or leased by the company.
  • The clarification by the IRS of what constitutes a betterment and a restoration will provide less wiggle room for some taxpayers.
  • The final regulations favor the taxpayer more than the temporary regulations did with the revisions on the casualty loss rule. Deductions for amounts spent for property damaged in a casualty are allowed in excess of the adjusted basis of the property as long as they would otherwise be considered deductible repair expenses. Capitalization is still required for the costs of restoring damage to property that would be capitalized.

An estimated 4 million businesses will be affected by these changes. As always, we at Tax Point Advisors welcome your questions and are ready to help you adjust to this new regulation governing repairs and capitalization. Please contact us for more information on details of these rules, and how they may affect you.

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