Dave Phelps

The IRS has issued final regulations giving guidance on capitalization versus expensing of costs, retirement of assets and proposed regulations on how to handle disposition of tangible property.  These regulations have a wide impact that will have an effect on virtually anyone who owns tangible property.  These rules are effective for tax years beginning on or after January 1, 2014.

Primary Areas of Regulation

These rules are voluminous but some clarity has been provided over the proposed regulations issued in prior years and some taxpayer-friendly revisions are included in the final regulations.  Five main areas are covered by the regulations:

  • Materials and supplies
  • Repairs and maintenance
  • Capital expenditures
  • Amounts paid for the acquisition or production of property
  • Amounts paid for improvement of property

Additional Considerations for Tangible Property  Owners

Some additional items of interest are noted below:

  • Taxpayers will not need to have an applicable financial statement to take advantage of a capitalization policy for expensing certain de minimis items.  This is relief for small businesses that wouldn’t have met this rule under the proposed regulations and would not have been allowed to utilize a capitalization policy.
  • There is a safe harbor rule for routine maintenance on a building which allows for the expensing of activities which are expected to be performed more than once in a 10 year period.
  • General asset account (GAA) election rules have been relaxed to allow the same flexibility for taxpayers who do make certain elections to those who do not elect GAA treatment.
  • Taxpayers who are acquiring, disposing or renovating tangible property need to talk to their tax advisor regarding the impact of these regulations on their transaction.  There are some advantages to be had if the proper steps are taken.

For further information on these regulations, please contact me or call (513) 241-8313.