The IRS released final tangible property “repairs” regulations under Sections 162(a) and 263(a), regarding the deduction and capitalization of expenditures related to tangible property. The final regulations replace temporary regulations that were issued in December 2011. These regulations take effect January 1, 2014. They affect virtually any taxpayer that acquires, produces, improves or disposes of tangible property.
At a length of over 200 pages, the regulations remain complex. Taxpayers will need to devote significant time and effort to study these regulations and to address their impact on their tax accounting. Taxpayers must decide whether they can deduct costs as repairs and maintenance or must capitalize the costs and recover their costs over a period of years. Every business, especially those with significant fixed assets, must develop an understanding of the regulations and their requirements.
The final regulations take effect January 1, 2014 and the IRS is not expected to delay this effective date. Taxpayers also have the option to adopt the final regulations for 2012 and 2013 early or apply the December 2011 temporary regulations. The IRS is expected to provide additional guidance for taxpayers to change their methods of accounting to elect to apply either set of regulations retroactively and to comply with the 2014 effective date. Some accounting method changes will require taxpayers to make adjustments under Code Sec. 481(a), in effect, applying the regulations to past years and calculating the impact on income.
The final regulations make significant changes to simplify some of the complex rules from the December 2011temporary regulations. The changes include new and revised safe harbors, as well as new relief provisions for small businesses. The regulations provide simplification and reduce controversy by allowing taxpayers to follow their financial accounting (“book”) policies in some areas.
The IRS did not finalize every portion of the 2011 regulations. To address some problems with the temporary regulations on the disposition of depreciable property, the IRS issued new proposed regulations that ease the requirements for taxpayers to deduct the cost of building components that they replace.
De minimis safe harbor
The final regulations eliminate a controversial ceiling on the use of this safe harbor. Taxpayers with applicable financial statements, generally a certified audited statement, can elect to apply the safe harbor annually to deduct property that costs $5,000 or less. The regulations extend the safe harbor to taxpayers without a certified audited financial statement, but only for property that costs $500 or less. The key is that taxpayers must have written book policies in place at the beginning of the year to apply the safe harbor, taxpayers should ensure that they have a written book policy in place by January 1, 2014.
Routine maintenance and improvements
The final regulations retain controversial unit of property rules that apply the rules for real property to eight separate building systems. However, the rules do extend the routine maintenance safe harbor to real property and provide a new safe harbor for small taxpayers. The application of the routine maintenance safe harbor to real property is limited to types of routine maintenance expected to be performed more than once during a ten-year period. This is not as favorable as the safe harbor from the 2008 proposed regulations but is more favorable than the temporary 2011 regulations that eliminated it altogether.
The final regulations allow taxpayers to elect to follow book and capitalize repair and maintenance costs if these costs are capitalized for financial accounting purposes. This provides significant simplification over the temporary regulations for taxpayers that would prefer to follow book. Note that this does not apply to amounts expensed for book purposes.
Materials and supplies
The threshold for deducting materials and supplies was increased from $100 to $200 and generally applies to items expected to be consumed in 12 months or less, or that have an economically useful life of 12 months or less. Taxpayers can no longer elect to capitalize materials and supplies that are not rotable, temporary or emergency standby spare parts.
The new proposed regulations for dispositions significantly modify the temporary regulations and simplify the rules around partial dispositions. There is no longer a mandatory requirement to recognize a partial disposition except in the case of a sale or casualty loss. Now a taxpayer can make an annual election to dispose of a portion of an asset. Consequently, the general asset accounting rules generally reverted to the “old” rules since the changes made in the temporary 2011 regulations are no longer necessary.
If you have any questions regarding the compliance obligations that your business now must face, and the opportunities that many of these new rules present, please contact Andrew Lattimer at firstname.lastname@example.org or 860-570-6327.
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