New IRS regulations have made some changes to how taxpayers record and report tangible property. The final regulations must be followed by all taxpayers starting in tax years beginning on or after January 1, 2014. The regulations make changes within five main areas: Materials and supplies; repairs and maintenance; capital expenditures; amounts paid for acquisition or production; and improvements.
Some of the key areas included in these regulations are distinguishing between fixed assets versus materials and supplies, what costs taxpayers must capitalize on the acquisition of tangible property, whether expenditures related to the property’s operation are deductible repairs or capitalized as improvements, when to recognize dispositions, and even how to define the unit of property. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted. The final IRS regulations make distinguishing between repairs and improvements simpler.
Three Safe Harbors:
Routine Maintenance Safe Harbor: Recurring activities dedicated to keeping property in efficient operating condition can be expensed. Routine activities are those that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.
Small Business Safe Harbor: For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the adjusted basis of the property for repairs, maintenance, improvements and similar activities each year. (A qualified small business is generally one with gross receipts of $10 million or less.)
Materials and Supplies: Any item that is considered materials or supplies and is under $200 is allowed to be expensed. The taxpayer does not have to wait until the material is used before they are allowed to take the deduction. If the amount is above this threshold then the taxpayer must record it as an asset and not expense it until the item is used.
Note: Taxpayers can consider amending tax returns for years beginning before 2014. Items to consider would be certain capitalized items such as repair items being depreciated rather than expensed, improper treatment of bonus depreciation or removal costs that were capitalized. The IRS will allow taxpayers adjust these items by filing Form 3115 Change in Accounting Method to take advantage of the savings.
Please note that these regulations are quite expansive and we have included only some of the highlights above which apply to tax years beginning on or after January 1, 2014. Contact your Newburg & Company tax advisor to learn more about how best to take advantage of these final regulations and how they specifically impact your situation.