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Repair vs. Capital: Impact of the New Regulations

Last week, the IRS released additional guidance pertaining to Repairs, Capitalization and Disposition of Assets. The guidance comes to us in two forms – namely:

  • Proposed Regulations with respect to disposition of assets under §1.168(i)-1 and 1.168(i)-8
  • Permanent Regulations for § 162(a) and §263(a) which essentially replace the Temporary Regulations issued in December 2011

While the Proposed Regs are still subject to comment, the suggestion that they will take effect on January 1, 2014, leads us to believe that there will not be much change between now and then.

You may recall the flurry of activity back in 2011 when the Temporary Regulations were issued. Many firms encouraged taxpayers to adopt a general asset treatment for their buildings and improvements.  Much of that stopped abruptly within a few months of the issuance. Based on these new regulations, the general asset election for most taxpayers will in fact be punitive in nature due to the partial disposition rules in the Proposed Regulations. However, taxpayers who use the general asset accounts and those who do not can elect the partial asset disposition rules on their timely filed tax returns.

The Permanent Regulations do not offer much change to the Temporary Regulations they replaced. There are some safe harbor rules for expensing certain thresholds of assets. It should be noted that the election of safe harbor rules does not give the taxpayer much flexibility to expense certain items that fall well within the materiality thresholds, developed as part of a comprehensive cost segregation study however.  The Permanent Regulations do allow taxpayers who have Applicable Financial Statements to utilize a $5,000 per invoice threshold for expensing certain items (de minimis rule) although the regs also provide for the IRS’s retention of authority to change the safe harbor amount via published guidance.

We believe that recently released regulations will not influence the way we advise our clients to expense, capitalize, or track assets. We are in the process of developing a comprehensive overview for our clients, but wanted to update you today with this abbreviated message.

We will also be conducting a webinar on this subject on October 21, 2012.  For your convenience, we have included a link for registration.

Space is limited so reserve now:  https://www3.gotomeeting.com/register/269906182