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The Internal Revenue Service (IRS) has issued long-awaited final repair regulations on the treatment of costs to acquire, produce or improve tangible property. Taxpayers will need to apply these IRS regulations going forward to determine whether they can deduct costs as repairs and maintenance under Code Sec. 162 or must capitalize the costs and depreciation or amortization of them must occur over a period of years under Code Sec. 263.
The final repair regulations retain the basic requirements and the structure of the temporary and proposed IRS regulations issued in December 2011 (the 2011 regulations). At a length of more than 200 pages, the final regulations are complex. At the same time, they make significant changes that will benefit taxpayers, including new and revised safe harbors, as well as new relief provisions for small business.
As expected, the IRS regulations take effect Jan. 1, 2014. Some provisions apply only to amounts paid or incurred in tax years beginning on or after Jan. 1, 2014. The IRS is not expected to delay these effective dates, since taxpayers were informed of the impending changes in the rules almost two years ago. Complying with the final regulations will require significant time and effort, despite several taxpayer-friendly changes. Every business, especially those with significant fixed assets, must develop an understanding of the regulations and their requirements.
The regulations will provide simplification and reduce controversy to the extent they allow taxpayers to follow their financial accounting (“book”) policies. For example, the de minimis rules provide a $5,000 safe harbor per item, provided taxpayers have a policy on their books to deduct items within the safe harbor. The rules for repairs and maintenance also allow taxpayers to follow their book policies.
Retroactive Election of Final Repair Regulations
While the final repair regulations take effect Jan. 1, 2014, taxpayers can choose to apply them retroactively for their 2012 or 2013 tax years. Taxpayers can also choose to apply the 2011 regulations to 2012 or 2013. The IRS must provide additional guidance for taxpayers to change their methods of accounting to elect to apply either set of regulations retroactively and to comply with the 2014 effective date. Some accounting method changes will require taxpayers to make adjustments under Code Sec. 481(a), in effect, applying the regulations to past years and calculating the impact on income.
More to Come
The IRS did not finalize every portion of the 2011 regulations. To address some problems with the temporary regulations on the disposition of property with depreciation capabilities, the IRS issued new proposed regulations. The new proposed regulations relieve many taxpayers of the requirement to set up general asset accounts and make retroactive elections so that they can deduct the cost of building components and other portions of property that they replace.
Significant Provisions to IRS Regulations
As you can see, the final repair regulations are extensive and complex. Determining whether particular costs should be deducted or capitalized will be challenging, especially with the Jan. 1, 2014, effective date looming.
Doeren Mayhew stands ready to help you digest and understand the IRS regulations, determine what accounting policies you may need and make appropriate elections to comply with the regulations. For more information, contact our tax advisors in Michigan, Houston or Ft. Lauderdale.
Source: CCH, a Wolters Kluwer company
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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