2014 New IRS Tangible Property Regulations

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Richard B. Dawson, CPA Craig M. Pike, CPA
David E. Smith, CPA Patricia S. Hodgdon, CPA
Eric A. Purvis, CPA/ABV, MST, CVA Jeremy S. Handlon, CPA
Joel H. Bassett, CPA/PFS, CMA, CIA Michael P. Kelly, CPA
Kirk J. Purvis, CPA, CFERyan W. Dawson, CPA
William H. Souter, CPA, MSTJeffery W. Hicklin, CPA
Adam P. Johnson, CPABenjamin E. Gosselin, CPA, CFE

 

Dear Clients and Other Friends:

The IRS has issued long-awaited repair regulations on the treatment of costs to acquire, produce or improve tangible property. Nearly every taxpayer with fixed assets will be impacted by these new regulations. Taxpayers will need to apply these new regulations to determine whether they can deduct costs as repairs and maintenance or capitalize the costs and depreciate them over a period of years.

At over 200 pages, these new regulations are complex. The new set of rules will require us to devote significant resources annually to adhere to these new rules. In addition, most taxpayers with fixed assets will likely be required to file Form 3115, Application for Change in Accounting Method, with their 2014 tax returns.

It isn’t all bad news. The regulations include taxpayer-friendly provisions. They make significant changes that will benefit taxpayers, including new and revised safe harbors, as well as new relief provisions for small businesses.

Among the significant provisions that may impact you or your business include the following:

De minimis safe harbor – Taxpayers with audited financial statements can deduct as a current cost an item that costs $5,000 or less. Taxpayers without audited financial statements can deduct items that cost $500 or less. Taxpayers with audited financial statements must have written policies in place at the beginning of the year to use this safe harbor. All taxpayers must maintain their books and records consistent with this provision.

Routine maintenance safe harbor – Allows taxpayers to deduct certain building repairs or improvements expected to be incurred more than once over a ten year period.

Small taxpayer safe harbor – Allows taxpayers with $10 million or less in annual gross receipts to deduct a limited amount of improvements expenditures on qualifying buildings costing $1,000,000 or less.

In 2014, taxpayers are allowed to reconsider items previously capitalized that would have been expensed based upon the new regulations. In other words, you might be able to retroactively apply the new regulations and currently deduct items that were previously capitalized. This will require filing Form 3115. In many cases, we are discovering the tax benefit exceeds the added compliance cost.

Also in 2014, taxpayers can write off partial dispositions of property when a substantial restoration has been made. For example, when a roof is replaced and capitalized, taxpayers can take a deduction for the portion of the original building cost relating to the roof. The requirements and calculations are complex but can result in significant savings. This provision also requires the filing of Form 3115.

As you can see, the repair regulations are extensive and complex. Our firm stands ready to help you digest and understand the regulations, determine what accounting policies you may need, and make appropriate elections to comply with the regulations. We are working to maximize any savings opportunities that may exist in complying with these new regulations. If you have any questions please do not hesitate to call.

Very truly yours,

 

 

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