In December 2011, the IRS released new ground-changing rules aimed at the age-old debate about what is a repair versus capital expenditure. This has been a hotly contested area by the IRS for years; one that has played out time and again in court. The IRS was hoping these new rules, set forth in over 200 pages of tax regulations, would help end this constant battle with taxpayers.
The new rules, originally issued as temporary regulations, were recently finalized after some revisions, and will be mandatory for everyone beginning January 1, 2014 (though you can elect to adopt some or all of the final rules for 2012 and/or 2013).
These rules are the new paradigm for determining the treatment of all expenditures incurred in acquiring, producing, or improving tangible property, whether real or personal. More specifically, these regulations:
- Modify and expand the definition and treatment of materials and supplies
- Create a bright-line de minimis expensing rule
- Introduce and define a “Unit of Property” (UOP) as the reference point for property improvements, including componentizing buildings
- Provide capitalization standards for UOPs based upon the concepts of “betterment”, “adaptation” and “restoration”
- Continue and expand safe harbor rules for routine maintenance expense (expanded to real property)
- Allow a partial disposition of property, including structural components of buildings
What should you look for in determining whether these rules apply to you? If you answer “yes” to any of the following, contact your accountant or call Perkins to learn more about how these rules will impact you:
- I don’t know the impact of these rules on my audited financial statements.
- I don’t have a capitalization policy, or if I do, it’s not in writing or it isn’t consistently applied.
- I own leasehold improvements or real property that is more than 2 – 3 years old.
- I have remodeled, renovated or expanded real property.
- I have made and capitalized repairs/improvements to real or personal property in prior tax years.
- I own rotable, temporary or emergency spare parts.
- I have “ghost” assets still on your books that may no longer be physically present.
- I have previously filed a Repair & Maintenance accounting method change.
- I own real property on which a cost segregation study hasn’t been performed.
- And our favorite, I have an interest in potentially accelerating deductions.
As you can imagine with over 200 pages of regulations, there is much more to these rules than just this brief summary. Almost everyone will be impacted by them. Our recent blog post dives a little deeper into these rules and the changes made by the IRS when finalizing the regulations.
For further information, consider attending our next Real Estate Connection event scheduled for Thursday afternoon, December 5th, at the Bing Lounge, where we will provide examples of how these rules specifically impact the real estate industry. RSVP here to reserve your spot!