On September 13, 2013 the Internal Revenue Service (IRS) released the long-awaited final tangible property regulations. The final regulations provide guidance on how taxpayers can deduct or capitalize their expenses for maintaining, repairing or replacing their property. The regulations modify and supersede the temporary regulations issued in December 2011 and include multiple changes that are very taxpayer-friendly and simplify and clarify the applications of the new rules. The rules are generally effective for tax years beginning on or after January 1, 2014 but taxpayers have the option to adopt them as early as years beginning on or after January 1, 2012 under certain circumstances.
The IRS also issued new proposed regulations that significantly modify the rules for disposition of tangible property.
Some of the new key favorable changes include:
De minimis rule simplified: The IRS revised the safe harbor and a taxpayer with applicable financial statement is now permitted to follow its book capitalization policy for tax purposes provided that the policy does not exceed $5,000 per invoice (or per item). Furthermore for taxpayers with an applicable financial statement the safe harbor also applies to financial accounting procedures that expense amounts paid for property with an economic useful life of 12 months or less as long as the amount per invoice (or item) does not exceed $5,000. The threshold is lowered to $500 for per invoice (or per item) for taxpayers without applicable financial statements. The definition of an applicable financial statement includes a certified audited financial statement, a financial statement filed with the SEC or one required to be filed to the federal or a state government or any federal or state agencies.
Materials and Supplies increased: The definition of materials and supplies was increased to $200.
Routine maintenance safe harbor now applies to buildings: This safe harbor provides that certain maintenance activities performed by a taxpayer for buildings and tangible property will not result in a restoration or improvement that needs to be capitalized, if the taxpayer reasonably expects that these activities will need to be performed more than once during a 10 year period.
Safe Harbor for Small Taxpayers: There are certain rules for determining whether an amount improves, betters or restores property. A qualifying small taxpayer can elect to not apply the improvement rules to an eligible building when certain criteria are met.
Election to capitalize improvement costs: Taxpayers can now elect to follow their book capitalization policy for improvement costs in order to capitalize as an asset and depreciate the cost. Many taxpayers may make this election to reduce the administrative burden associated with maintaining separate records for book and tax purposes.
Partial disposition election: The proposed regulations allow taxpayers the flexibility to choose whether to recognize gain or loss on a disposition of any portion of an asset, including a structural component without having to
identify it as a separate asset prior to the disposition. Additionally, a building and its structural components are now clearly defined as one unit of property and a General Asset Account treatment is not required. This also minimizes circumstances in which the original part or component and the subsequent replacements of the same part are being depreciated at the same time.
Virtually every business will be affected by the new guidance and will be required to file one or more applications for change of accounting method to conform to the new regulations. Please contact HLB Gross Collins, P.C. and our tax team will assist you by preparing an analysis of the complete effect of the new regulations on your business. We will identify any current year deductions, provide guidance on new written policies and procedures that need to take effect on January 1, 2014, and prepare all necessary filings with the IRS. While the new regulations appear overbearing to comply with, they are generally taxpayer-friendly and can result in substantial tax savings.