In late 2013, the Internal Revenue Service (IRS) released final regulations that will greatly impact a taxpayer’s ability to capitalize or expense both purchases and amounts paid to maintain and improve tangible and real property.  We are pleased that the IRS has released these regulations because they provide clarity to many gray areas that surround these topics.

So, what do the new regulations mean for you?  Well, simply put – ALL ENTITIES, including individuals, that have tangible or real property used in business or investment will be impacted.  The IRS has allowed for some early adoption of the rules, but all taxpayers must be in compliance effective for tax year 2014.

Capitalization Policy for Purchases of Tangible and Real Assets
For the purpose of this communication, real property is defined as buildings used in a business or investment. Tangible assets are everything else, such as computers, equipment, furniture, tools, supplies, and leased equipment. Intangible assets are not included in the new regulations.

The new rules require that taxpayers capitalize all tangible and real asset purchases unless a De Minimis Safe Harbor Election is filed. To claim the election, you must have a capitalization policy in place as of January 1, 2014. This policy may be established retroactively.

The De Minimis Safe Harbor Election will allow taxpayers to expense amounts paid for tangible and real property under a ceiling limitation of either $5,000 or $500.  The $5,000/$500 limits are per invoice, or item (as substantiated by the invoice).  Also, a taxpayer may expense materials and supplies under $200 with a useful life of 12 months or less.

• The $5,000 limit applies to  taxpayers that have an audited financial statement or a financial statement that must be submitted to a Federal or State government agency
• The $500 limit applies to all other taxpayers
• This election is made by filing an annual statement (prepared by your Whalen tax advisor)  that is  attached to your 2014 Federal tax return

Client Action:
Effective for 2014, all taxpayers need to re-evaluate their capitalization policies.  Contact your Whalen & Company advisor for a sample.

Capitalization Policy for Repairs and Improvements of Tangible and Real Property
A large section of the new regulations deals with repairs and improvements made to tangible assets and buildings.  Under the new regulations, assets must be divided up into units of property (UOP). UOP are all components of the asset that are functionally interdependent. For example, buildings are broken down into nine UOP systems: HVAC, plumbing, electrical, escalators, elevators, fire protection and alarm systems, security systems, gas distribution system, and other structural components.

How a UOP is treated depends on if the repair or improvement replaced a major component. Generally, the larger the unit of property, the more likely that costs will be classified as a repair and then expensed.

There are exceptions, such as the Small Taxpayer Safe Harbor and the Routine Maintenance Safe Harbor.

Client Actions:

• If you plan to do any major repairs or improvements to property, please provide the details of the project to your Whalen & Company advisor.
• If you own a building that you lease to multiple tenants, please be sure to indicate the tenant space where the improvements or repairs were done.

As a firm, Whalen & Company is implementing “best practices” to ensure that our clients are in compliance with the new tax changes.  In addition to this blog, we are offering an on-demand webinar that provides additional information and guidance on the new regulations.  If you are interested in viewing this webinar, click here: https://whalencpa.wpengine.com/2014-repair-regs.html.  Plus, Whalen advisors are proactively contacting clients regarding the new rules.

For more detailed information on how the new regulations affect your specific situation, please contact your Whalen advisor at 614-396-4200.

• Category: Other News & Info, Whalen & Company