The Internal Revenue Service has finally issued regulations clarifying when costs related to fixed assets must be capitalized and when they can be expensed.
To expense or capitalize?
Generally, the cost to acquire, produce, or improve tangible property must be capitalized and depreciated over a number of years. Conversely, the cost of repairing and maintaining fixed assets is deductible in the year of the expense.
The difficulty has been distinguishing between the two kinds of costs. The new “repair regulations” attempt to clarify when costs may be currently deducted and when they must be capitalized.
Safe harbors in the new rules
Here’s an overview of safe harbor rules that may affect the way you classify costs.
- De minimis purchases
In general, you can deduct the cost of tangible property if the amount you pay for the property is less than $500 per invoice or per item. This is an all-or-nothing rule, meaning if an asset costs more than $500, you cannot take a partial deduction.
To take the deduction, you’ll need a written accounting policy in place by the beginning of your tax year and file an annual statement with your federal tax return.
- Repairs and maintenance
You can expense costs for routine maintenance of buildings and other property. For buildings “routine” means maintenance you expect to perform more than once in a ten-year period. The costs for additions or for adapting property to a different use are not considered routine maintenance and should be capitalized.
For other assets, “routine” is defined as maintenance you expect to undertake more than once during the asset’s life.
- Improvements
Generally, improvements to your business building are capitalized and depreciated over the life of the building. Under the new rules, if your business’s gross receipts are ten million dollars or less and the unadjusted basis of your building is one million dollars or less, you may choose to expense the cost of improvements.
To qualify, the total amount you pay during the year for repairs, maintenance, and improvements cannot be greater than $10,000 or 2% of the unadjusted basis of the building, whichever is less.
Complex regulations, with varying effective dates
The repair regulations are effective for tax years beginning after 2013, so will apply to your 2014 federal income tax return.
As with any part of the tax law, these regulations contain numerous complex provisions. If your company owns or leases fixed assets, contact us for assistance in applying the rules to your business. Contact LSL CPAs at 714.672.0022
