On September 19, 2013, the US Internal Revenue Service (IRS) released final regulations regarding the deduction and capitalization of expenditures related to tangible property, also known as the final “repair” regulations. These final regulations provide guidance on the application of sections 162(a) and 263(a) of the Internal Revenue Code on the amounts paid to acquire, produce, or improve tangible property. They provide a framework that can assist in the differentiation between capital expenditure and deductible business expenses. These regulations apply to all taxable years, and begin on January 1, 2014.
As all taxpayers who acquire, produce or improve tangible property will be affected by these regulations, the tax team at AG Tax has prepared a brief summary on the main points.
Five Main Tangible Property Topics Addressed by Final Regulations:
• Materials and supplies (Reg. §1.162-3)
– The new final regulations expand the definition of materials and supplies to include property that has an acquisition or production cost of $200 or less, and simplify the application of the de minimis safe harbor (Reg. §1.263(a)-1(f)) to materials and supplies.
• Repairs and maintenance (Reg. §1.162-4)
– This rule remains unchanged as the amounts paid for repairs and maintenance to tangible property are deductible if they are not required to be capitalized under the general rule.
• General rules for capital expenditures (Reg. §1.263(a)-1)
– The final regulations eliminate the ceiling in the de minimis safe harbor rule, and replace it with a new safe harbor determined at the invoice or item level and based on the policies used by the taxpayer for its financial accounting books and records.
– Taxpayers with an applicable financial statement may deduct up to $5,000 of the cost of an item of property per invoice.
– For smaller businesses without applicable financial statements, the per-item or invoice threshold amount is $500.
• Acquisition or production of tangible property (Reg. §1.263(a)-2)
– The final regulations retain applying Code Sec. 263 (a) to amounts paid to acquire or produce a unit of real or personal property and specifying general requirements to capitalization rules.
• Improvement of tangible property (Reg. § 1.263(a)-3)
– The final regulations generally retain early rules for determining whether an amount improves, betters, or restores property, including buildings.
– The regulations rely on qualitative instead of quantitative factors to provide fair and equitable treatment to determine whether a particular cost constitutes a betterment.
– Safe harbor rules apply for qualifying small taxpayers (i.e. with gross receipts of $10 million or less). Such a taxpayer can elect to not apply the improvement rules on an eligible building property if the total amounts spent for repairs, maintenance, and similar activities does not exceed the lessor of $10,000 or 2% of the unadjusted basis of the building.
It is important that taxpayers familiarize themselves with all regulations through consultation with professional tax advisors. Establishment of modified business procedures must occur prior to January 1, 2014, in order to ensure alignment with the most current and permissible tax procedures, as well as to maximize tax benefits.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance
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