On September 13, 2013, the IRS issued their final Tangible Property Regulations (TPRs). The long-awaited repair regulations provide guidance on the deduction and capitalization of expenditures related to capital property. These final TPRs are similar in structure to the temporary TPRs that were issued in 2011, however with beneficial changes and additional new safe harbors. These TPRs are likely to impact all industries and, in general, are effective for tax years beginning on or after January 1, 2014.
The following is a summary of the more significant changes in the newly released TPRs:
De Minimis Safe Harbor Election – A revised de minimis rule has been established that provides a safe harbor provision that allows taxpayers to expense the purchase of tangible property, if consistent with its book capitalization policy, up to $5,000 per item or invoice if the taxpayer has an applicable financial statement, but only up to $500 per item or invoice if the taxpayer does not have an applicable financial statement. Generally, an applicable financial statement is a financial statement required to be filed with the SEC, or an audited financial statement certified by an independent CPA or a financial statement (other than tax return) required to be filed by federal or state government. For the book capitalization policy to be effective, it must be in effect as of the first day of the tax year it applies to. The de minimis rule is a safe harbor, not an absolute limit. An examining agent may accept a policy that exceeds the safe harbor amounts, if in his or her agreement with the taxpayer, the policy clearly reflects income. If the de minimis rule is elected in a given year to apply to the acquisition of tangible property, it must be elected and applied for materials and supplies as well. Therefore, the $200 threshold is adjusted up to match the de minimis capitalization policy (i.e. $5,000 limit with applicable financial statement, $500 without).
Materials and Supplies – The final TPRs generally define materials and supplies as non-inventory items that have an economic useful life of 12 months or less or cost less than $200 each (previously less than $100). If the materials and supplies item costs $200 or less, regardless of its economic useful life, it can be expensed currently. If it costs more than $200, and has an economic useful life of 12 months or less, the cost needs to be expensed in the year used or consumed.
Small Taxpayer Safe Harbor Election – The final TPRs added an additional safe harbor whereby smaller taxpayers are not required to capitalize improvements if the total paid for repairs, maintenance and improvements per property does not exceed the lesser of $10,000 or 2% of the adjusted basis of the property. In order to qualify as a small taxpayer, the taxpayer’s annual receipts for the preceding three years must average $10 million or less and the adjusted basis of the property must be $1 million or less.
Addition of Partial Relief from Casualty Loss Rule – The final TPRs retain the rule that a restoration requiring capitalization includes the replacement of an asset or portion of an asset resulting from a casualty event. In addition, the proposed regulations would make the recognition of a casualty loss mandatory and not subject to the partial disposition election. Under the final TPRs, a taxpayer would not be required to treat as a restoration the amount of its post-casualty replacement expenditures that exceed the adjusted basis of the property damaged in the casualty.
Expansion of the Routine Maintenance Safe Harbor – The final TPRs expand the routine maintenance safe harbor to include buildings. The new revised safe harbor provides that routine maintenance expected to be performed on an asset more than once during the class life is considered to be a repair. For a building and its structural components and building systems, routine maintenance that is expected to be done more than once during a 10 year period beginning when the building or building system is placed in to service by the taxpayer, is now considered a repair.
Partial Disposition Election – The TPRs retain the partial disposition election which allows taxpayers to recognize a loss upon disposition of a structural component of a building. Although generally elective, the partial disposition rule is required in certain situations. Additionally, for assets included in a general asset accounts, a general asset account termination election or qualifying disposition election may be necessary. The TPRs also include changes to the basis and asset identification rules for partial dispositions.
General Asset Account Rule Changes – The temporary 2011 regulations allowed taxpayers to record a loss on a retirement of a structural component of a building. However, if the building was included in a general asset account, the taxpayer was not required to recognize a retirement loss. Under the new TPRs, the building is recognized as a single asset and taxpayers may waive loss recognition on disposition of a structural component, even if a general asset account election was not made.
Consult your CPA so you do not miss any tax saving opportunities now available from the new TPRs.
If you have any questions on this topic, please contact Jamie Downey at 800-849-6022 or JMDowney@DowneyCoCPA.com.
