Final Tangible Property Regulations
After several rounds of Proposed and Temporary Regulations, the IRS issued Final Regulations effective for tax year’s beginning January 1, 2014 to help clarify the treatment of tangible property. The Regulations address:
- Treatment of materials and supplies
- Guidance on deductible repairs verses capital improvements
- De Minimis Safe Harbor election for expensing property
- Small Taxpayer Safe Harbor election to expense repairs, maintenance and improvements to an owned or leased building
- Routine Maintenance Safe Harbor election for recurring activities performed to keep buildings or systems in its ordinarily effective operating condition
- Proposed regulations on partial dispositions of assets
While we won’t cover everything in this article, we wanted to highlight two items that affect many taxpayers. If you would like additional information on the Final Regulations and how they impact your business, please contact us.
De Minimis Safe Harbor
The new De Minimis Safe Harbor election for expensing property was one of the best pro-taxpayer items to be included with the Final Regulations, and changed significantly from the Temporary Regulations. The Final Regulations provide taxpayers can now deduct the cost of property acquired up to a specified dollar amount, even if its useful life is beyond one year.
To qualify for the De Minimis Safe Harbor:
- Taxpayers without an audited financial statement must have a policy in place at the beginning of the year to expense the property on their books, not to exceed $500 per invoice or item.
- Taxpayers with a financial statement that is audited by a CPA must have a written policy in place at the beginning of the tax year to expense the property on their books, and the cost cannot exceed $5,000 per invoice or item.
Unfortunately, a reviewed or compiled financial statement does not qualify for the higher deduction amount.
Overall, this election will simplify the reporting of small property acquisitions made during the year for many taxpayers.
Capital Improvements vs. Deductible Repairs
The other item we want to highlight is the guidance on capital improvements verses deductible repairs. The Regulations provide dozens of examples to illustrate what is considered a capital improvement, and therefore must be capitalized, verses a deductible repair expense. The decision is based on the facts and circumstances, but a general rule is the costs must be capitalized if it is a restoration of a major component or a substantial structural part. The costs are deducted as a repair when it is not a major component or not a significant portion of the component.
A major component focuses on the function of the component in the unit of property. A major component is a part or combination of parts that performs a discrete and critical function in the operation of the unit of property. A substantial structural part focuses on the size of the replacement component in relation to the unit of property. A substantial structural part is a part or combination of parts that comprise a large portion of the physical structure of the unit of property. Because of these subjective definitions, the determination of whether the costs must be capitalized or expensed requires careful analysis.
The Regulations are extensive and likely will require further analysis for many businesses. This article is intended to provide a general overview and is not intended to be relied upon as professional advice. Please contact Copeland Buhl & Company PLLP to discuss compliance concerns as well as planning opportunities available in the Final Regulations.
Alisa Rogers, CPA