The IRS recently made several needed changes regarding when taxpayers must capitalize and when they can deduct expenses related to tangible property (including acquisition, maintenance, repair and replacement). These changes are being seen as “taxpayer-friendly” in relation to the original temporary regulations set forth in 2011.
Following are the primary considerations for business owners:
- All businesses with fixes assets must comply with these new rules beginning January 1, 2014.
- Approximately 4 million taxpayers will be impacted by these new tax regulations, and a combined 1.1 million hours of additional administrative time will be required to address these new rules.
- Taxpayers may, at their own discretion, retroactively apply these changes back to the start of the 2012 tax year to maximize the benefits of this legislation.
In attempts to reduce taxpayer controversy by clarifying, simplifying and refining, this new legislation addresses the following five key areas:
- Materials and Supplies (see IRS Reg. §1.162-3)
- Repairs and Maintenance (see IRS Reg. §1.162-4)
- Capital expenditures (see IRS Reg. §1.263(a)-1)
- Amounts paid for the acquisition or production of tangible property (see IRS Reg. §1.263(a)-2)
- Amounts paid for the improvement of tangible property (see IRS Reg. §1.263(a)-3).
Though this article is not meant to be an exhaustive source for these new regulations, following are a few of the most impactful points businesses need to be aware of:
- The IRS expanded its definition to include any component acquired to maintain, repair or improve property, reasonably expected to be consumed within 12 months or with a useful economic life of 12 months or less with a cost of up to $200 (up from the previous $100). The stated goal of this change was to allow for the consideration of more common business supplies.
- The IRS expanded the existing routine maintenance safe harbor to allow for the expensing of routine maintenance if and only if such maintenance is reasonably expected to be performed more than once in a 10 year period. They excluded repairs, maintenance, and/or improvements for network assets such as railroad track, oil and gas pipelines, water and sewage pipelines, power transmission and distribution lines, and telephone and cable lines.
- The IRS changed the regulations to allow taxpayers to opt out of expensing repair and maintenance costs in exchange for treating these costs as capital expenditures.
For more information on the new capitalization regulations and/or to set up a consultation whereby we can help you to determine how to best adhere to these changes, contact Lescault and Walderman at 866-496-2042.
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