Final Tangible Property Repair Regulations Released by IRS

The IRS released the final tangible property repair regulations which provide a framework for distinguishing capital expenditures from deductible tangible property costs. These important new regulations will affect virtually all taxpayers that acquire, produce, or improve tangible property, and will replace, remove, and modify the temporary regulations that were issued in 2011.

The major revisions from the 2011 temporary regs that taxpayers should know about are as follows:

De Minimis Safe Harbor Rule The final regs allow taxpayers with applicable financial statements and written accounting procedures in place by the beginning of the tax year, to deduct amounts paid for property, as long as the amount per invoice (or per item) does not exceed $5,000.  This change to the de minimis rule eliminates the ceiling rule that was set forth in the 2011 temporary regulations and allows amounts properly expensed under a taxpayer’s financial accounting policies to be deductible for tax purposes.

Those without an applicable financial statement may deduct amounts paid for property, as long as the amount per invoice (or per item) does not exceed $500.  In order to take advantage of this threshold, the taxpayer must have a written accounting procedure in place by the beginning of the tax year.

Routine Maintenance Safe Harbor Rule The final regs extended the routine maintenance safe harbor to now include 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.

Relief for Small Businesses The final regs permit a qualifying small taxpayer to elect to not apply the improvement rules to an eligible building if the total amount paid during the taxable year for repairs, maintenance, improvements and similar activities performed on the eligible building does not exceed the lesser of $10,000 or 2 percent of the unadjusted basis of the building. In order to be eligible, the building must be owned or leased by the qualifying taxpayer, provided the unadjusted basis of the building is $1,000,000 or less.

Materials and Supplies Among several changes to this section, the final regs raise the threshold to $200 for property that is exempt from capitalization.

In addition to these final regulations, the IRS has also issued a notice of proposed rulemaking with respect to the Disposition of Property.  While a formal six-month period for comments will allow taxpayers to provide feedback, these final regulations are effective for tax years beginning Jan. 1, 2014.   These new regulations are complicated and your Anders advisors are here to help you implement these new regulations.  Please stay tuned for additional blogs to come in relation to these changes.

Be sure to check back each week for more updates, or contact your Anders advisor –