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The Internal Revenue Service (IRS) has issued regulations for the treatment of tangible property, effective for tax years beginning on or after Jan. 1, 2014. With the new regulations now in effect, taxpayers will likely need to include one or more election statements and Form 3115s to adopt the rules under the final regulations.
While not all inclusive, a summary of some of the main points of these new regulations are below. Please be aware this is a brief synopsis, and the elections and accounting method changes are more complicated than what is summarized below. Doeren Mayhew is reviewing the applicability to our client base and will prepare elections and Form 3115s where applicable to ensure our clients are compliant with the new regulations.
For taxpayers with audited financial statements, an election can be made to expense all expenditures $5,000 and under for book and tax purposes. A taxpayer may elect smaller amounts. A capitalization policy greater than $5,000 would prevent a taxpayer from being safe harbored for tax purposes. A written policy must be in place as of the first day of a taxpayer’s tax year to qualify for this election.
Taxpayers who do not have audited financial statements may elect a capitalization policy to expense all expenditures up to $500 or less for book and tax purposes.
Taxpayers with average annual revenues for the past three years of less than $10,000,000 and building costs less than $1,000,000 (on a per building basis) may expense all expenditures (both repairs and improvements) incurred up to the lesser of $10,000 or 2 percent of the buildings costs.
This safe harbor allows taxpayers to expense as repairs and maintenance expenditures which taxpayers expect to incur more than once during an assets Alternative Depreciation System (ADS) tax life for personal property and during a 10 year period for a building.
The new regulations distinguish material and supply expenditures into two categories, incidental and non-incidental. Incidental material and supplies are items carried on hand for which no record of consumption is kept. These expenses are deducted in the tax year their cost are paid or incurred.
Non-incidental material and supplies are items carried on hand for which there is a record of consumption kept. These expenses must be expensed in the tax year the items are used or consumed.
The new regulations define in detail what comprises a unit of property (UOP). The UOP is important in determining whether expenditures and disposals of prior capitalized assets can be written off. A UOP for a building now includes the building structure and nine building systems while a UOP for other tangible property is determined based on whether the UOP functions interdependently.
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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