These mandatory regulations may require action from you
Final IRS regulations issued September 13, 2013, impact any taxpayer who incurs costs to acquire, maintain or improve tangible property. The regulations provide direction on whether and when the costs incurred must be capitalized versus treated as an expense.
Tangible asset repair regulations
Any taxpayer, regardless of industry, may benefit from the new rules, including banking, retail & hospitality, manufacturing, office buildings, pharmaceutical, warehouse & distribution facilities, utilities and many others
Current year cash flow savings from identification of expenditures made during the current year that qualify for expense treatment
Implementation of capitalization policies and procedures to maximize benefits utilizing safe harbor rules
Identification and adoption of accounting methods that meet requirements of new regulations and maximize current and future deductions of repair and maintenance expenditures
Minimization of non-compliance risk
How AGH's Tangible asset repair regulations service can help your organization
The tangible property regulations are mandatory, not elective. The regulations were generally effective for tax years beginning on or after January 1, 2014. The regulations no longer allow taxpayers to look back into prior years and "catch-up" any missed opportunities. Thus, consideration must be given each tax year on whether or not any benefits exist and, if so, any benefits must be captured on current year returns.
The IRS previously issued a “stand-down” for audits on repairs, maintenance and related dispositions, but this grace period has ended. Again, taxpayers no longer have the option to defer compliance. Audits in this area will likely be an area of high activity. Starting in 2018, a particular area of interest for the IRS is on how the gain or loss is calculated on disposition of assets.
Carefully conducted cost segregation studies should also be considered and can be combined with the adoption of these IRS regulations to increase any positive impact and to lessen any potential negative impact. AGH’s cost segregation team of engineers and tax professionals is available to assist you in this implementation.
The final regulations are complex and confusing, and each taxpayer’s facts and circumstances are different. AGH’s team of professionals is proficient at evaluating the final regulations and applying them to each individual taxpayer’s situation to achieve significant increases in cash flow.
Areas of benefit
Four categories of expenditures have been specifically identified and defined by the final regulations, which provide an opportunity for expense treatment. Determination of whether or not compliance has been met is the key. In order to comply, expenditures may satisfy any one of the four below categories:
- De minimis safe harbor - $5,000 (AFS) or $2,500 (Non-AFS) limitation (as applicable)
- Routine maintenance safe harbor
- Materials and supplies
- Partial dispositions
In addition to the above categories, a second major area of opportunity under the final regulations exists for taxpayers who incur costs to remodel or repair assets. Those taxpayers must apply guidance provided related to areas defined in the final regulations as betterments, adaptations or restorations. Costs for the following types of activities often may be able to take advantage of the new regulations and receive expense treatment:
| Remodeling Costs |
| Roof repairs |
Replacement of doors & windows |
| Parking lot repairs |
Replacement of ceilings |
| HVAC repair or replacement |
Regular maintenance |
| Refresh store appearance |
Removal of walls |