Do you still have to depreciate that thumb drive?
[Note to our friends and clients] This post is far more technical than most, but don’t let that diminish its importance to your business in 2014! We warned everyone almost a year ago that IRS was planning to force the small business owner to depreciate a $100 thumb drive over 5 years. Large businesses were not going to be held to this draconian standard and got a pass on the regulations as we reported at this link. Business owners voiced their concerns over this tremendous cost addition to their record keeping tasks. IRS heard your voice and cowered back into the shadows – for one year.
Just like the Terminator character played by Arnold Schwarzenegger, IRS has made good on their statement that “I’ll be back.”
The IRS has issued much-anticipated final “repair” regulations that provide guidance on the treatment of costs to acquire, produce or improve tangible property.
The new rules are effective in 2014 and will affect every business client with tangible assets. Be sure to review our summary below, and stay tuned for more updates. As a matter of fact, why not subscribe to our automatic E-Mail service on the SCA home page? Just enter your email address and click subscribe. If you use an RSS reader E-mail us for a specific code to automatically pull business or personal posts into your reader.
Here’s the countdown to the effective date of the new depreciation rules. Don’t let your business be caught unprepared.
[ujicountdown id=”Taxmageddon” expire=”2014/01/01 00:00″ hide = “true”]
At a length of over 200 pages, the regulations remain complex. To help you prepare, we offer a plain English summary by subject area. Just click on the area you wish to read
[toggle title=”When do the new rules start, and could they apply to 2013?” open=”false”]
What do the new rules start?
The final regulations replace temporary and proposed regulations issued in 2011 that provided guidance on amounts paid to improve, acquire, produce or dispose of tangible property. The final regulations must be applied for taxable years beginning on or after Jan. 1, 2014. For taxable years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014, a taxpayer may apply the final regulations, the temporary regulations or a combination of both.
[/toggle]
[toggle title=”What assets do the new rules cover?” open=”false”]
What do the new rules cover?
The short answer is just about everything.
Unit of property
The final regulations retain the unit-of-property rules included in the temporary regulations. Specifically for buildings, the regulations continue to apply the repair rules separately to both the building structure and defined building systems (for example, HVAC, plumbing and electrical systems).
Betterments
The rules in the regulations for determining whether amounts result in a betterment of a unit of property — and therefore would result in capitalization of costs — are largely the same as the 2011 temporary regulations. The final regulations add examples applying the rules and also changing facts and analyses for certain pre-existing examples in the temporary regulations. For instance, the examples relating to building refreshes and remodels include significant changes.
Restorations
The rules in the regulations for determining whether an amount is paid to restore a unit of property and therefore would result in capitalization of costs are again basically the same as the temporary regulations. However, the major component rule and the casualty loss rule both include significant revisions. The regulations add a new definition for major components and substantial structural parts of buildings but do not adopt a bright-line standard. The final regulations introduce a number of new examples and significantly change other examples, including those related to buildings.
Routine maintenance safe harbor
The safe harbor for routine maintenance has been expanded to apply to buildings. This rule allows taxpayers to deduct costs related to maintenance activities performed on buildings or building systems if the activities are reasonably expected to be performed more than once during the 10-year period beginning at the time the building or building system is placed in service.
New elections
The regulations include a number of new elections that need to be made with timely filed returns. For example, a “small taxpayer” (defined as a taxpayer with average annual gross receipts of $10 million or less) may elect not to apply the repair regulations to a building with an unadjusted basis of $1 million or less if the total amount paid during the taxable year for repairs, maintenance and other similar activities performed on the building does not exceed the lesser of (i) 2% of the unadjusted basis or (ii) $10,000. In addition, a taxpayer may elect to capitalize repair expenses for a taxable year if the taxpayer treats the amounts as capital expenditures for book purposes.
[/toggle]
[toggle title=”Is there any way out of this mess for a small business?” open=”false”]
Is there any way out of this mess?
You may qualify to use the De minimis rule. The final regulations significantly change the complex and burdensome de minimis rule in the temporary regulations. The regulations create a new safe harbor allowing certain taxpayers to elect to deduct amounts paid for property if the amount does not exceed $5,000 per invoice or per item as substantiated by the invoice. To qualify for the safe harbor, a taxpayer must have an “applicable financial statement” and have in place written accounting procedures treating such amounts as expenses as of the beginning of the taxable year. A taxpayer without an applicable financial statement can elect to deduct amounts paid for property if the amount does not exceed $500 per invoice or per item as substantiated by the invoice.
[/toggle]
[toggle title=”What will we do differently on the tax return?” open=”false”]
What will we need to do differently on the tax return?
The concise answer is that the depreciation schedule will increase in size exponentially: however, The regulations include a number of new elections that need to be made with timely filed returns. For example, a “small taxpayer” (defined as a taxpayer with average annual gross receipts of $10 million or less) may elect not to apply the repair regulations to a building with an unadjusted basis of $1 million or less if the total amount paid during the taxable year for repairs, maintenance and other similar activities performed on the building does not exceed the lesser of (i) 2% of the unadjusted basis or (ii) $10,000. In addition, a taxpayer may elect to capitalize repair expenses for a taxable year if the taxpayer treats the amounts as capital expenditures for book purposes.
[/toggle]
[toggle title=”What about the items that are regular supplies?” open=”false”]
What about my regular supplies and materials?
The final regulations retain the general framework of the temporary regulations. The new rules do, however, expand the definition of materials and supplies to include property that has an acquisition or production cost of $200 or less (increased from $100 or less in the temporary regulations), clarify the application of the optional method of accounting for rotable and temporary spare parts, and simplify the application of the de minimis safe harbor to materials and supplies.
[/toggle]
[toggle title=”Should you just sell all your assets and lease?” open=”false”]
Maybe I should just sell all my stuff and lease?
Maybe, but maybe not.
The reproposed regulations significantly change the rules for dispositions of depreciable property. The regulations allow a taxpayer to recover basis upon the disposition of a component of a unit of property, but,best of all. they eliminate the temporary regulations’ complicated rules related to building components that would have required many taxpayers to use the general asset account rules. This alone could have tripled the preparation cost of an average corporate return.Instead, the more- simplified new rules allow taxpayers to elect to recover basis upon the partial disposition of an asset.
[/toggle]
Remember that we’re just a click away if you need help.
[popup text=”Contact Us!” color=”primary” icon_before=”envelope” header=”Contact Us” animate=”true”]
Use this form to sent us a message.
[contact-form-7 id=”192″ title=”Contact form 1″]
[/popup]