The IRS has issued final, comprehensive “repair regulations” that affect both real and personal property used in a business or in a rental property. All businesses and individuals that file a schedule C or E will be affected but the new regulations. All regulations will begin with the 2014 tax year. Some highlights of the new regulations:
- Taxpayers can elect a safe harbor and deduct as expenses all items with value below a certain threshold ($500 without an audited financial statement and $5,000 for those who have their financials audited by a CPA firm).
- Safe harbors are also available to property owners with $10 million or less in revenues and buildings with an unadjusted basis of $1 million or less. The safe harbor allows deductions for repair and maintenance of up to $10,000 or two percent of the unadjusted basis of the building
- Replacing an item (the common example is a roof) means that the previous item’s cost can be treated as a disposition, and the undepreciated amount can be taken as current expense, even if it was part of the building’s purchase price.
- Taxpayers have a one-time opportunity for tax year 2014 to “scrub” their fixed assets schedule by going back over prior years to see if any capitalized property should have been expensed or written off as replaced. (For example, you may have replaced the roof twice and all three are still being depreciated.) These additional deductions can be taken on the 2014 tax return.
- The IRS is requiring that all taxpayers in a trade or business (including rent-producing property) file a form 3115 to show that they are in compliance with the new regulations. The IRS has cautioned that NOT filing a Form 3115 in 2014 may raise a red flag and be pulled for further review..
In addition to the above, the repair regulations also impact how businesses account for materials and supplies. The regulations are complicated, not straightforward, and in some cases deductions can be lost forever if the 2014 return is filed without addressing these new repair regulations.
What does this mean for you? If you own a business or small rental property, we strongly encourage you to file Form 3115 with your 2014 tax return to show compliance with the new regulations. Form 3115 is complicated and you may have to file more than one. For example, you will have to file a separate Form 3115 for most business returns, plus on your personal return you may need a Form 3115 for a Schedule C business (such as a single-member LLC) and another for a Schedule E rental.
Have questions about the new regulations and filing Form 3115? Need help finding those prior-year deductions on your fixed-asset schedule? Contact LSL CPAs at 714.672.0022.
