The IRS has issued long-awaited final regulations providing guidance on amounts paid to acquire, produce, or improve tangible property in its September 19th Federal Register. The finalized regulations modify and supersede the temporary regulations that were in effect since December 2011. This is the fourth time the IRS has issued these so-called “repair regulations” but the first time they have been in final form.
The regulations are more than 200 pages long! In today’s post, we will discuss two of the specific provisions that you may find helpful in the year-end tax planning for your business.
The De Minimis Safe Harbor Has Been Simplified
Prior to the final regulations, you were permitted to deduct certain amounts paid to acquire tangible property as long as certain reporting requirements were met. With those requirements met, a deduction was allowed only up to an annual ceiling amount.
Now, with the finalized regulations, companies with an audited financial statement can expense asset purchases up to $5,000 as long as the capitalization policy is written and used on the financials. There is no longer an overall cap on the amount that can be deducted with the de minimis safe harbor method.
For smaller companies (those without audited financial statements) the capitalization safe-harbor amount is $500.
The Unit of Property Concept
No analysis of the final tangible property regulations would be complete without a discussion about the Unit of Property (UOP) concept. Much of the guidance in the final regulations revolves around what constitutes the UOP that is being placed in service, repaired, or improved. The smaller the UOP, the more likely costs incurred in connection with that UOP will have to be capitalized. For example, work on an engine of a vehicle is more likely to be classified as an expense that must be capitalized if the engine itself is classified as a separate UOP. By contrast, if the UOP is the vehicle, the engine work has a better chance of passing muster as a repair.
In the final regulations this UOP concept becomes increasingly attractive in the real estate sector, especially when a building is subdivided into subsystems. This allows you to deduct expenditures that previously would have been capitalized.
In addition to these two areas – de minimis and UOP - there are many other planning topics to explore, including:
- Dispositions of property and retirement studies;
- Routine maintenance of the safe harbor method; and the
- Enhanced definition of betterments, adaptations, and restorations.
The new regulations go into much more depth and delve into many other areas of which we will cover in subsequent blog posts. The Tax Warriors® at Drucker & Scaccetti have broad and deep expertise in the area of tangible property regulations. We’d like to put this expertise to work for you and determine if the new “repair regulations” can give your company a competitive tax advantage.
Contact us via “Ask A Tax Warrior” below or call us at either our Philadelphia office at (215) 665-3960, or our Scranton office at (267) 765-0205. We are always prepared to help you with your real estate or any other tax-related business matter.