Effective September 19, 2013, the Internal Revenue Service (IRS) has finalized the regulations regarding the deduction and capitalization of expenditures related to tangible property (commonly referred to as the repair and maintenance regulations). These final regulations apply to taxable years beginning on or after January 1, 2014. There are new provisions in the regulations that are taxpayer-friendly and affect virtually all types of businesses.
The final regulations attempt to resolve some of the discrepancies that have arisen in the past between the IRS and tax payers over how to classify costs as either an expense or capital expenditure. Within these new regulations, more guidance has been issued in order to correctly classify those costs.
The next advantage of the new regulations for the taxpayer is the partial disposition of assets election. This election allows a taxpayer to claim a loss on a disposed component of a building or any other asset (classified as a single unit of property). This election minimizes the instances where two of the same components of a building (i.e. roof) or similar assets are simultaneously depreciated. Keep in mind that there will need to be a determination of the adjusted basis of the components that are disposed, which in some cases could be difficult. The best and most accurate way to determine the adjusted basis of the disposed property is a cost segregation study. Other alternatives include original cost records and prior invoices, a detailed building appraisal, or the use of consumer prices indices.
Another advantage of the new regulations is the safe harbor election regarding the de minimis rule. Under this election, taxpayers can expense costs dependent upon the level of financial statement assurance the taxpayer produces on an annual basis. For taxpayers that produce a certified audited financial statement or financial statement that is filed with a state or local government, the dollar threshold is $5,000. For taxpayers without this type of financial statement assurance, the dollar threshold is $500. Costs are limited to the total invoice or per line item of the invoice if it is itemized. It is important to note that a written capitalization policy needs to be in place at the beginning of the year for which the election is made.
Another part of the safe harbor election is the routine maintenance safe harbor that allows taxpayers to deduct the cost of recurring maintenance on tangible personal property and buildings to keep it in efficient operating condition. To qualify, the taxpayer must reasonably expect to incur the expenditure more than once over a 10-year period for buildings or the useful life for all other assets.
Overall, the favorable changes in the new regulations are a breath of fresh air from the IRS that show willingness to work with the taxpayers. Feel free to email firstname.lastname@example.org if you have any questions or click here to learn more about our repair and maintenance expense analysis and partial asset disposition studies.