The repair regulations have many complex areas to understand. One of the biggest changes to understand is the new elections that taxpayers can utilize on their tax returns. For the most part, these elections can be made on tax returns with taxable years beginning January 1, 2014. We are waiting for the IRS to issue transition guidance to help taxpayers understand how to apply some of these elections prior to 2014. The six elections available under the final and proposed repair regulations are as follows: De minimis safe harbor, small taxpayer safe harbor, capitalize and depreciate certain materials and supplies, capitalize amounts paid for employee compensation or overhead, capitalize repair and maintenance costs, and partial disposition elections. These annual elections all need to be filed on an originally filed tax return by the due date including extensions. Below is a brief summary of some of the elections:
- De minimis safe harbor – this might be the most important election to understand. Our next blog will go into more detail on this particular election. This election will allow a taxpayer to deduct items under certain dollar thresholds. The threshold differs whether the taxpayer has an applicable financial statement or not. If a taxpayer has an applicable financial statement, the taxpayer may deduct up to $5,000 per item. If a taxpayer does not have an applicable financial statement, the amount is limited to $500 per item to deduct. In order to make the election, a capitalization policy must be in effect at the beginning of the year.
- Small taxpayer safe harbor– in order to facilitate some of the administrative burden that the new regulations placed on small taxpayers, the small taxpayer safe harbor election was introduced. Under this election, a qualified small taxpayer is one that has annual average gross receipts over the last three years of $10,000,000, or less and that owns or leases a building with a cost no greater than $1,000,000. A qualified small taxpayer does not need to capitalize improvements if the total annual costs for repairs, maintenance and improvements do not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building.
- Partial Disposition – this is a great opportunity for taxpayers and an area that we will discuss in more detail in future blogs. This election allows a taxpayer to recognize a gain or loss on the disposition of a building structural component. The taxpayer makes the election on a timely filed tax return by recognizing the gain or loss of the partial building disposition. A taxpayer can use any reasonable method, some of which are outlined in the proposed repair regulations, to determine the amount of the portion of the building that should be disposed.
As you can see, there are many elections associated with repair regulations that affect all taxpayers and industries. It is important that taxpayers recognize when they can take advantage of these elections available, and that they incorporate them on their timely filed tax returns. For help with these complicated elections, contact an Anders advisor.
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