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TAX UPDATE

Final Repair & Capitalization Regulations Released

The IRS released the long awaited final regulations dealing with Repair and Capitalization under 162(a) and 263(a). These regulations replace and remove the temporary regulations issued in December of 2011. These regulations do not finalize the portion of the 2011 temporary regulations dealing with General Asset Accounts (GAAs); these are addressed in separate proposed rules. The final regulations will apply to tax years beginning on or after January 1, 2014.

The final regulations add a few items and clarify or remove others. Some of the major issues handled or discussed in these regulations include:

Addition of a Safe Harbor for Small Taxpayers: This safe harbor will allow certain small taxpayers, meeting specific criteria, some flexibility in determining how they decide to handle improvements. To qualify the taxpayer must have gross receipts of $10,000,000 or less, the building must have an initial cost of $1,000,000 or less, and the improvements, repairs, and similar activities must not exceed $10,000 or 2 percent of the unadjusted basis of the building.

Changes to De Minimis Rule: The regulations deal with the complexity of the de minimis rule by eliminating the ceiling. Instead the IRS allows for a taxpayer to deduct amounts properly expensed for financial accounting policies. This new rule requires that, for companies with an applicable financial statement, the de minimis amount not exceed $5,000 per invoice or per item substantiated by the invoice. To qualify for this, the taxpayer must have a written financial accounting capitalization policy at the beginning of the tax year in question, treating the amounts paid for property less than a certain dollar amount as an expense.

De Minimis Rule for Companies Without Audited Financials: The 2011 regulations did not provide any de minimis safe harbor for companies without a financial statement. Under the new regulations the IRS establishes a safe harbor of $500 per invoice or per item for companies without a financial statement. To qualify for this, the taxpayer must have a written financial accounting capitalization policy at the beginning of the tax year in question, treating the amounts paid for property less than a certain dollar amount as an expense.

Materials and Supplies: The final regulations raise the threshold for a supply from $100 to $200.

Routine Maintenance Safe Harbor: The new regulations include a routine maintenance safe harbor for buildings. In order to qualify for this safe harbor the owner must reasonably expect to complete the maintenance activities more than once every 10 years.

Materials and Supplies: The final regulations raise the threshold for a supply from $100 to $200.

In addition to the final regulations the IRS also issued a notice of proposed rulemaking with respect to General Asset Accounts and the Disposition of Property. These proposed regulations make some significant changes to the 2011 temporary regulations. Specifically, they seem to give more flexibility to taxpayers who do not elect General Asset Accounts. Additionally, the IRS confirms the intent that partial disposals of an asset are allowed. This confirms the position that a taxpayer may deduct a portion of a structural component even if the structural component was not separately identified prior to the disposition. In most cases the partial disposition is elective and done through an election. However, a partial disposition is not elective in the case of a casualty event as detailed in Sec. 165.

These new regulations are complicated and require a more in depth analysis than this article can supply. Please contact your Blue Tax Advisor to further discuss these new regulations and their impact on your business.

 

If you have further questions or would like to speak to one of our professionals regarding any of the tax issues discussed above, please contact your Blue & Co. advisor or e-mail us at blue@blueandco.com or call us at 800-717-BLUE.
 

Please visit our website at http://www.blueandco.com for more information regarding the services we provide.

CIRCULAR 230 DISCLOSURE: To ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein.


 

 

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