The IRS has issued final regulations, effective for tax years beginning on or after January 1st 2014, that create guidelines for the income tax treatment of tangible property expenditures. These new regulations provide guidance on the capitalization and depreciation of capital expenditures, the treatment of materials and supplies, and expanded opportunities to write off partial asset dispositions. They present new risks and opportunities that affect taxpayers in every industry that owns depreciable capital assets, spends funds on repairs and maintenance, and/or material and supplies.
Application of the new regulations requires detailed analysis for each taxpayer as the changes are complicated and cover a number of different areas. Knowing how they impact your business is critical to maximizing tax deductions while maintaining tax compliance. Some of the changes allow you to apply the new rules retroactively while other changes are either new annual elections or require filing an accounting method change. Your BPM advisor has the resources to assist you in determining how these new regulations will affect your business and could result in significant tax savings in 2014.
Below is a summary of the new regulations and how they may impact your business.
Materials and Supplies – The cost of acquiring materials and supplies is generally deducted in the tax year they are first used or consumed. The per-item threshold is increased to $200 and standby emergency spare parts are included in the definition of material and supplies. An election to capitalize materials and supplies is limited to rotable, temporary, and standby emergency spare parts.
De Minimis Safe Harbor – A safe harbor allows taxpayers to deduct amounts paid to acquire or improve property if they meet certain requirements. The overall ceiling on the amount deductible under the de minimis rule is eliminated and replaced with a per item limitation of $5,000 for taxpayers with an applicable financial statement (AFS) or $500 for taxpayers without an AFS.
Acquisition Costs – Amounts paid or incurred to acquire or produce tangible property must be capitalized. Any related transaction or facilitative costs must also be capitalized while contingency fees are capitalized only if the property is ultimately acquired.
Improvement Costs – Amounts paid for betterment, restoration, or adaptation to a unit of property must be capitalized. The definitions for these costs are refined by clarifying the types of activities that constitute each type of cost. Examples of a building refresh are modified to better illustrate the definition of an improvement.
Routine Maintenance Safe Harbor – Routine and recurring amounts paid to keep a unit of property in ordinary efficient working condition may be treated as repair costs. The safe harbor is expanded to include buildings while network assets are excluded from the safe harbor.
Small Taxpayer Safe Harbor – The new safe harbor allows qualifying taxpayers with $10 million or less in annual gross receipts to deduct limited amount of improvement expenditures on eligible buildings with an unadjusted basis of $1 million or less.
MACRS – The IRS also finalized temporary regulations regarding the disposition of property subject to depreciation (MACRS property). The final regulations provide rules for determining gain or loss upon the disposition of MACRS property, determining the asset disposed of, and accounting for partial dispositions of MACRS property.
Dispositions – Taxpayers may claim a loss upon the disposition of a structural component (or a portion thereof) of a building or upon the disposition of a structural component (or portion thereof) of any other asset without identifying the component as an asset before the disposition event.
Change in accounting method – The IRS also issued new revenue procedures to accompany the final regulations which outline the related accounting method changes. The procedures cover items such as the routine maintenance safe harbor, deductibility of non-incidental materials and supplies, and deductibility of rotable spare parts.
Elections – Several important provisions which were accounting methods under the temporary regulations became annual elections under the final rules. Those provisions include elections to apply the de minimis safe harbor, apply the small taxpayer safe harbor, capitalize repair and maintenance costs, and capitalize materials and supplies.