Authored By: Shane Roberts, Shane is currently a manager over tax and pension work in the Logan office. He has clients in a variety of industries including construction, agriculture, manufacturing and many others. He also handles all the pension design and administration work from the initial stages of designing a 401(k) plan to the yearly compliance work.
The IRS has issued the final “repair” regulations, which govern when a taxpayer can deduct their expenses for acquiring, maintaining, repairing and replacing tangible property. These regulations will affect virtually every business and they must be followed starting January 1, 2014. The final regulations have been simplified, which is a relative term when talking about the IRS and over 200 pages of regulation, compared to the 2011 temporary regulations.
Materials and Supplies Defined
The final regulations have clarified and made some taxpayer friendly changes to some of the provisions of the temporary regulations issued previously. The first change is regards to materials and supplies. The final regulations define “materials and supplies” to mean tangible property used or consumed in the taxpayer’s business operations that is not inventory. The materials and supplies also must be:
• A unit of property with an acquisition or production cost less than $200. The temporary regulations required an acquisition cost of less than $100;
• A unit of property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations;
• Fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months, or less;
• A component that is acquired to maintain, repair, or improve a unit of tangible property owned, leased or serviced by the taxpayer, but is not acquired as part of any single unit of tangible property
• Identified by the IRS in published guidance.
When the temporary regulations came out, many critics asked the IRS to raise the acquisition cost up to $500. The IRS rejected this amount and settled on $200.
The second provision the IRS clarified is routine maintenance. Under the temporary and final regulations the IRS included a routine maintenance safe harbor that allows a taxpayer to deduct amounts paid for routine maintenance if it is for recurring activities that a taxpayer expects to perform to keep a unit of property in its ordinary efficient operating condition. The IRS contends that activities are routine if, at the time the unit of property is placed in service, the taxpayer reasonably expects to perform the maintenance activities more than once during the class life of the unit of property.
The final regulations expanded the safe harbor to allow expensing for routine maintenance activities on a building and its structural components. The taxpayer must reasonably expect to perform such maintenance more than once over a 10-year period.
Election to Capitalize Repair and Maintenance Costs
The final regulations also added a new election to capitalize repair and maintenance costs. This election allows taxpayers to make an annual election to opt out of expensing repair and maintenance costs if the taxpayer treats the costs as capital expenditures on its books and records. A taxpayer must elect to capitalize these expenses on their tax return and depreciate the expenditures. The election only applies to amounts that the taxpayer incurs in carrying on a trade or business and treats as capital expenditures on its books and records used for computing regularly computing income. This election is made by attaching a statement to a timely filed return including extensions.
De Minimis Safe Harbor for Acquired or Produced Property
Generally taxpayers are required to capitalize amounts paid to acquire or produce a unit of real or personal property. The final regulations allow a taxpayer with an applicable financial statement to deduct up to $5,000 of the cost of an item of property per invoice. In order to take advantage of this rule, taxpayers must have written book policies in place at the start of the tax that specify a per-item dollar amount (up to $5,000). This means that calendar year taxpayers have until the end of 2013 to get this policy in place. Taxpayers that do not have applicable financial statements also received a safe harbor de minimus, however it is a per invoice limit of $500 instead of the $5,000 limit. Applicable financial statements are audited financial statements issued for SEC reporting issued by a CPA or audited financial statements issued by a CPA to report results of operations for shareholders or to acquire credit.
This de minimus safe harbor is an election and must be elected annually by attaching a statement to the taxpayer’s return for the year elected. The election will apply to all qualifying expenses, including materials and supplies that meet the requirements and a taxpayer cannot exclude particular qualifying expenses.
Containing over 200 pages, the final “repair” regulations are extremely complex and cumbersome. As CPA’s at Cook Martin Poulson, we pride ourselves on being proactive, not reactive to new laws and regulations. We have studied these new regulations and have developed strategies that will help our clients navigate the new laws including cost segregation studies and other techniques that will save our clients money and help with their cash flow. Call us today to set up a meeting where we can analyze your business and help you prepare for these new regulations.