A popular area of questions that I get are based on the IRS released permanent and proposed regulations and on when we capitalize assets and deal with the disposition of assets. The main Regulations are § 1.162(a) (deductions, § 168(i)-8 (disposition of assets) and of course § 1.263(a)-1, 2, and 3 (repair vs. capital). They did leave the door open for taxpayers who want to rely on the Temporary Regulations and will accept a change of accounting method relying on the Temporary Regulations.
We will cover here the basic sections of the Regulations that changed in 2013. In general, under Reg. § 1.263(a)-2(d)(1), amounts paid to acquire or produce a unit of real or personal property must be capitalized. However, under the elective de minimis rule, such amounts (but not inventory or land), along with amounts paid for any material or supply, don’t have to be capitalized if:
- The taxpayer has an AFS, has written accounting procedures in place at the beginning of the tax year for expensing amounts paid for such property under certain dollar amounts, and treats such amounts as expenses on its AFS in accordance with such written accounting procedures; and
- The aggregate of amounts paid and not capitalized under the de minimis rule for the tax year are less $5,000 per invoice or per item as specified on the invoice.
- There is no cap on this. (Reg. § 1.263(a)-1(f)(i)).
- If the taxpayer does not have an AFS then the limitation is $500 per invoice or per item as specified on the invoice (Regs. § 1.263(a)-1(f)(ii).
Betterment is a correction of a material defect or a material addition or a material increase in value or a material increase in productivity, efficiency or quality. The term “Material” is not defined here, so we are left with no bright line definition. There are a number of examples that are 30%, and that hint that this might be the cut-off point for materiality. The percentage is specific to certain property, so there is no absolute guarantee of general application.
Reg. § 1.263(a)-2 did not have any material changes except that the de minimis election was moved to Reg. § 1.263(a)-1(f). Facilitative costs had only minor changes in that facilitative costs incurred in deciding whether to purchase a property or which property to purchase are capital. Non-facilitative costs incurred in deciding which or whether to purchase property are not capital.
The UOP rules in Regs. § 1.263(a)-3 did not have any substantial changes made in the new proposed regulations
The new Regulations § 1.168(i)-8 discusses the dispositions of MACRS property and it does not apply to all MACRS property. Assets in General Asset Accounts (Regs. § 1.168(i)-1) are not affected. In addition, the unit defined as a disposition is a building and its structural components. Therefore, any disposition less than the building and its structural components is not a disposition unless the partial disposition rules are elected for those assets. You make this election by completing the appropriate section of the Form 4797 and reporting the gain or loss from the disposition on the tax return. The disposition is treated according to its facts and circumstances so it can be a sale, exchange, retirement, or physical abandonment of the assets.
We will be covering the new Regulations in detail as we move into the new year. Feel free to email or respond with questions to help clarify remarks made in this post.