The IRS has issued updated rules under §162(a) and §263(a) on when to deduct or capitalize amounts paid to acquire, improve, or produce tangible property.
Since the proposal of new regulations in 2006 it has taken seven years to finalize through various re-proposals.
"The re-proposed regs deal with rules for dispositions of depreciable property. These are important because they have rules for partial dispositions of depreciation property. For example, if you have a roof on a building and you remove the entire roof - rafters, joists, and everything - and replace it with a new roof, as you read through the rules, you would have to capitalize the major components. So if you remove the old roof and you couldn't recover the remaining basis, you would be depreciating two roofs, the new one, and the old one which was probably on the building when you purchased it. These rules allow that when a capital cost is new, you can recover the remaining basis in the old roof, and would give a loss deduction in that amount. The concept was first introduced in the temporary regs, and now the re-proposed regs. The difference is that the rules to take the partial disposition are much simpler in the re- proposed regs. For the 2012 and 2013 tax years, taxpayers can apply the final regs, the re-proposed regs, the temporary regs, or any combination thereof but beginning in 2014, the re-proposed regs will become final. Everyone must apply the final regulations of 2014." said David Auclair, the national managing principal in Grant Thorton's Washington National Tax Office
There is a small taxpayer exception if the taxpayer has average annual gross receipts of below $10 million and the building has an unadjusted basis of less than one million.
Also in the regulations there is a de minimis safe harbor to deduct either an invoice or item of $5,000 or less if the taxpayer has applicable financial statements if you have a written "capitalization policy" declaring what your threshold is for capitalizing vs. deducting in the year it was put in service. For taxpayers that don't have applicable financial statements the safe harbor amount is only $500 rather than $5,000.
Written by Barnett & Company CPAs
Since the proposal of new regulations in 2006 it has taken seven years to finalize through various re-proposals.
"The re-proposed regs deal with rules for dispositions of depreciable property. These are important because they have rules for partial dispositions of depreciation property. For example, if you have a roof on a building and you remove the entire roof - rafters, joists, and everything - and replace it with a new roof, as you read through the rules, you would have to capitalize the major components. So if you remove the old roof and you couldn't recover the remaining basis, you would be depreciating two roofs, the new one, and the old one which was probably on the building when you purchased it. These rules allow that when a capital cost is new, you can recover the remaining basis in the old roof, and would give a loss deduction in that amount. The concept was first introduced in the temporary regs, and now the re-proposed regs. The difference is that the rules to take the partial disposition are much simpler in the re- proposed regs. For the 2012 and 2013 tax years, taxpayers can apply the final regs, the re-proposed regs, the temporary regs, or any combination thereof but beginning in 2014, the re-proposed regs will become final. Everyone must apply the final regulations of 2014." said David Auclair, the national managing principal in Grant Thorton's Washington National Tax Office
There is a small taxpayer exception if the taxpayer has average annual gross receipts of below $10 million and the building has an unadjusted basis of less than one million.
Also in the regulations there is a de minimis safe harbor to deduct either an invoice or item of $5,000 or less if the taxpayer has applicable financial statements if you have a written "capitalization policy" declaring what your threshold is for capitalizing vs. deducting in the year it was put in service. For taxpayers that don't have applicable financial statements the safe harbor amount is only $500 rather than $5,000.
Written by Barnett & Company CPAs
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