In September 2014 the IRS issued the final regulation in a series of regulations commonly referred to as the “repair regulations”. Many industry experts consider these regulations to be some of the most extensive and wide-reaching that the IRS has issued in many years. The regulations potentially affect every taxpayer with depreciable assets, repairs and maintenance and material and supplies (i.e. virtually all business taxpayers and individuals with sole proprietorships and/or rental property). We are here to assist in helping you to understand and implement them, starting with a brief explanation below of some of the key points within the regulations.
Implementation of the regulations generally must occur for all affected taxpayers with their first tax year beginning on or after January 1, 2014 (i.e. the 2014 tax return). Almost all affected taxpayers will be required to file formal method change applications with the IRS to accompany their 2014 tax return. In some instances, multiple method change applications will be required. The IRS has indicated that it is currently suspending audit activity in this area to afford taxpayers adequate time to comply. Once the compliance period has passed, however, the IRS has indicated that they will be looking at all 2014 tax returns to ensure that formal method change applications have been made by taxpayers.
The final regulations issued by the IRS provide a framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible expenses. The legislation includes the following:
- definition of materials and supplies to include items costing less than $200 or with useful life of 12 months or less;
- an annual election to capitalize certain materials and supplies (primarily rotables and spare parts);
- separate de minimis safe harbors for expensing otherwise capital assets costing $500 or less;
- a safe harbor for “qualifying small taxpayers” (those businesses with gross receipts of $10 million or less) for improvements to “eligible building property”;
- a safe harbor for routine maintenance for buildings;
- requirement to remove assets currently on tax depreciation schedules that qualify as repairs under the final regulations;
- requirement to capitalize (and depreciate, if applicable) past expenditures deducted as repairs:
- definition of a unit of property;
- criteria for determining whether an expenditure relative to property results in a betterment, adaptation or restoration of a unit of property;
- an election to capitalize repair and maintenance costs;
- permission for reporting partial asset dispositions including a one-time (i.e. 2014) permitted lookback for prior partial asset dispositions that remain on taxpayer’s books;
- a rule that addresses the treatment of removal costs related to a disposition;
- requirement to change from impermissible to permissible methods of depreciation (including class lives, methods, bonus depreciation errors, etc.) with the 2014 return.
The above list is not intended to cover every area of the final regulations, but rather, those deemed to be the most commonly encountered. Each item has very detailed rules for implementation which are too voluminous to include. With each tax return preparation involving businesses, rental property or unreimbursed expenses, you may be asked additional questions to comply with the new complex regulations. Compliance with the regulations this year can be quite intensive and may require additional services, including additional tax forms which would result in an increase in fees.
We would be happy to answer any questions you have about the tangible property regulations, including helping you to implement these rules for your business and assist in compliance relative to your 2014 tax year.