The IRS Attempts to Clarify the Repair Regs!

3 minute read time.

You might wonder if this is even possible. But regardless, one has to express a certain amount of appreciation to the IRS for any attempt to explain these complicated regulations.

I’m sure you all know what I am referring to when I mention the “repair regs.” However, just in case, let me clarify what is being clarified: Near the end of 2013 (although generally effective for tax years beginning in 2014), the IRS issued final regulations governing the handling of expenditures for acquiring, producing, and improving tangible property. These have come to be commonly referred to as the “repair regs.”

Taxpayers and the IRS have disagreed for a long time on whether such additional expenses should be capitalized (and possibly depreciated) or expensed. Therefore, one would assume any regulations that could simplify the decision making process on whether or not to expense such costs would be most welcome. And, so they were, but they have also caused much confusion as to their actual application.

Today’s news is that after hearing from a sufficient number of taxpayers who needed further clarification of these regs, the IRS recently published FAQs with the hope of answering the most common ones.

                        

There are 11 FAQs and they cover the following topics:

  1. Which taxpayers do the final repair regs apply to?
  2. The de minimis safe harbor election: what it is, whether you have to capitalize all qualifying expenses, an explanation of the rules on applicable financial statements, how to make the election, and whether it affects other deductions for materials and supplies and/or repairs.
  3. Materials and supplies: how the new rules differ from the old rules, what is included, when they are deductible, and how to apply the final regs to them.
  4. A regulatory framework for how to determine if an expenditure is a deductible repair or a capital improvement.
  5. How to use the allowable “facts and circumstances” analysis.
  6. What are the simplifying alternatives to the facts and circumstances analysis: the safe harbor election for small businesses, the routine maintenance safe harbor, and the election to capitalize repair and maintenance costs.
  7. How the repair regs coordinate with other IRC provisions (basically, they have no effect).
  8. When and how the final regs are applied.
  9. When and how to make the elections provided for in the final regs: the de minimis safe harbor election, the safe harbor election for small businesses, and the election to capitalize repair and maintenance costs.

10. When and how to change your method of accounting to use the final regs.

11. Some simplified procedures for small business taxpayers to change their method of accounting to comply with the repair regs on a prospective basis for years starting on or after January 1, 2014, without having to file a Form 3115, Application for Change in Accounting Method.

Hopefully, with the release of this latest guidance, businesses can begin to more fully understand the application of these regs. Time and additional analysis will tell.


Fascinating Fixed Assets Fact: The date on which you acquire an asset is not always the date on which depreciation begins. You cannot depreciate an asset until it is actually placed in service