Final Regulations on the Treatment of Amounts Paid for Tangible Property

11/13/2013 - By John Mascaro, CPA

Generally, all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business may be deducted. Conversely, amounts paid to acquire, produce, or improve tangible property must be capitalized and not deducted. Existing standards for determining whether an expense may be deducted as a repair or must be capitalized require a facts and circumstances test. This method has been very controversial due to the subjective nature of the standards.

Various incarnations of temporary and proposed regulations (most recently issued in 2011) have attempted to simplify these rules. The IRS has issued final regulations that refine and simplify the rules contained in the temporary regulations and create a number of new safe harbors. In doing so, a framework is provided for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible expenses. The legislation included the following new provisions:

An election to capitalize certain materials and supplies
Separate safe harbors for taxpayers with an applicable financial statement (AFS) and those without an AFS
A new rule that addresses the treatment of removal costs related to a disposition
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
An election to capitalize repair and maintenance costs Other highlights of the legislation include:
The increased dollar amount threshold under the de minimis safe harbor for materials and supplies (to $200 from $100)
The elimination of the ceiling limit in the general de minimis safe harbor and its replacement with a safe harbor that is determined at the invoice or item level
A rule that allows reliance by consolidated group members on the AFS and written accounting procedures of the group of entities
The clarification of the treatment of transaction and other additional costs related to the acquisition and production of property subject to the safe harbor
The amendment of the general rules for the safe harbor for routine maintenance
The refinement of the rules for improvements made by a lessee
The clarification of the types of activities that constitute betterments to property
The revision of the major component rule and the casualty loss rule under the restoration standards
A modified description of the optional regulatory accounting method

Generally, the final regulations apply to tax years beginning on or after January 1, 2014, but you may choose to apply them to tax years beginning on or after January 1, 2012. You also have the option to use the 2011 temporary regulations for tax years beginning on or after January 1, 2012 and before January 1, 2014. Because the final regulations go into effect in 2014, you must revise your written accounting procedures to comply with the expensing limits by the end of 2013 if you want to use the de minimis safe harbor, and in many instances, you must also change your method of accounting. We would be happy to answer any questions you have about the tangible property provisions, and help you to implement these rules for your business. Please contact our office at your earliest convenience. SALTMARSH CLEAVELAND & GUND, P.A.