For the past nine years, the IRS and Treasury Department have made numerous efforts to provide updated rules regarding the deduction and capitalization of expenditures related to tangible personal property. They have issued several sets of proposed and temporary regulations, as well as various other forms of temporary guidance. September 13, 2013 was the day that final regulations (and new proposed regulations with regard to dispositions of MACRS property) under Sections 162(a) and 263(a) finally arrived.
While adopting many provisions of the 2011 temporary regulations, the new regulations introduce some simplification and create several taxpayer-friendly safe harbors.
Here are some (but not all) of the changes from the temporary regulations:
De Minimis Safe Harbor Election – The safe harbor has been simplified by eliminating the proposed ceiling, its applicability broadened, and eligible amounts increased. Taxpayers with an applicable financial statement (“AFS”) and a written policy as of the beginning of the taxable year may choose to deduct up to $5,000 per item or per invoice or for tangible personal property costing less than $5,000 with an economic useful life of 12 months or less.
Materials and Supplies – As with the temporary regulations, incidental materials and supplies are deductible when purchased and non-incidental materials and supplies are deductible when used or consumed. However, the dollar limit per unit of property was increased from $100 to $200.
Generally, if a taxpayer makes the de minimis safe harbor election, materials and supplies that fit within the de minimis safe harbor election are accounted for under the de minimis safe harbor and not as materials and supplies.
Small Taxpayer Safe Harbor Election – With respect to eligible building property , taxpayers with gross receipts of $10 million or less in any year may elect to not capitalize expenditures for repairs, maintenance, or improvements that do not exceed the lesser of $10,000 or 2% of the basis of a building.
Routine Maintenance Safe Harbor Election – The final regulations extend this election to buildings (and building systems) if the taxpayer reasonably expects to perform the routine maintenance more than once during the 10-year period beginning on the date placed in service.
Casualty Loss Rule – Allows deduction for amounts spent in excess of the adjusted basis of property damaged in a casualty event.
Election to Capitalize – Annual election to capitalize deductible repairs that are capitalized in financial statements.
Partial Disposition Election – Taxpayers may elect to apply a partial disposition rule to claim loss on the disposition of a structural component (or a portion thereof) of a building.
Section 481(a) Adjustment – Generally, any changes to comply with the final regulations will be considered a change in method of accounting, requiring proper filing and potentially Section 481(a) adjustments. Further guidance on making these changes is expected before the end of this year.
Impact to Your Organization
The final regulations will generally be effective for taxable years beginning on or after January 1, 2014. Taxpayers will therefore need to quickly evaluate the tax and financial impact of these changes. Calendar-year taxpayers should discuss with their auditors the anticipated impact on their annual filings. Some questions might include:
If these questions find you looking for answers, let our team of independent experts join in your conversations and help you navigate through the final regulations.
James T. Hedderman
Robert M. Gordon
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