Final Repair and Maintenance Regulations Require Immediate Action
December 10, 2013
On September 13, 2013, the Internal Revenue Service released final regulations addressing the treatment of repairs and maintenance expenses for federal income tax purposes.
The final regulations are extremely complex and create significant changes in how these expenses have typically been handled by most taxpayers. They also provide defined procedures for expensing de minimis items that require immediate action.
These new regulations potentially affect every taxpayer, including individuals, that operates a business, farm or rental activity.
Specifically, taxpayers with applicable financial statements are allowed to expense immediately amounts not exceeding $5,000 per invoice OR per item. Applicable financial statements are:
• Financial statements submitted to the SEC
• Audited financial statements
• Statements that are required to be submitted to a federal or state government or any federal or state agency
For taxpayers who do not have applicable financial statements as defined above, the de minimis threshold is reduced to $500 per invoice or per item.
To take advantage of this opportunity, qualifying taxpayers must also:
• Treat qualifying de minimis expenditures consistently for both financial and tax reporting.
• Include an irrevocable annual election to expense these items with their timely filed federal income tax return.
• Implement a written policy related to the expensing of de minimis expenditures prior to the beginning of the tax year. Hence, calendar-year taxpayers who wish to take advantage of this opportunity in 2014 must have a qualifying written policy in place prior to January 1, 2014.
Written policies must contain procedures indicating that amounts will be expensed for nontax purposes as follows:
• Amounts paid for property costing less than $5,000/$500 (as applicable); or
• Amounts paid for property with an economic useful life of 12 months or less
Please click here to view a sample policy.
The requirement for a written policy is mandatory for taxpayers with an applicable financial statement. While the regulations do not specifically require a written policy for taxpayers who do not have an applicable financial statement, we strongly encourage that a written policy be implemented nonetheless. Without a written policy, taxpayers qualifying for the $500 de minimis limit may be required to demonstrate that such a policy exists to support the expensing of these items.
The de minimis rules allow the expensing of smaller items and provide flexibility to make elections to apply the de minimis provisions on a year-by-year basis.
IMPORTANT NOTE: Expenditures that do not qualify under the de minimis provisions described above must be reviewed to determine if they must be capitalized or expensed under the final regulations.
Please contact your local EGP office for more information on implementing qualifying de minimis policies and how the new repairs and maintenance regulations may further impact you.
